Charitable Trusts and Non-Profits under the Income-tax Act 2025

Charitable and religious trusts and institutions are exempt from income tax only if they are registered and apply their income to their objects. The Income-tax Act, 2025 gathers the rules, earlier spread across sections 11 to 13 and 12AB of the 1961 Act, into a separate part on registered non-profit organisations. This note covers charitable purpose, registration, the application rule, income taxed at a special rate, and the leading Supreme Court decisions.

1. Charitable Purpose

Figure 1: Section 2(23) (old s.2(15))

• Definition. Charitable purpose includes relief of the poor, education, yoga, medical relief, preservation of environment, preservation of monuments and objects of artistic or historic interest, and the advancement of any other object of general public utility.
• General public utility. An entity in this residuary category may carry on trade, commerce or business only in the actual course of achieving its object, and receipts from such activity must not exceed 20 per cent of total receipts of the year.
• Religious purpose. Public religious purposes are also covered, but application for the benefit of a particular religious community or caste is a specified violation.

2. The Registered Non-Profit Regime

Figure 2: Chapter XVII, Part B of the 2025 Act

• Registration, s.332 (old s.12AB). A trust, society, section 8 company or specified institution established in India wholly for charitable or religious purposes must register; provisional registration runs for three tax years and regular registration for five, or ten for smaller entities.
• Regular income, s.335. Income from charitable or religious activities, property held for such purposes, voluntary contributions and permissible commercial income; corpus donations are excluded.
• Application, s.341. At least 85 per cent of regular income must be applied to the objects in India in the year, with disallowance for cash payments above the limit and for lapses in deducting tax; donations to other registered bodies count only in part.
• Accumulation, s.342. Income not applied may be accumulated for specified purposes for up to five years, on filing the prescribed form, if invested in permitted modes.
• Taxable income, s.336. If the 85 per cent test is met, taxable income is nil; the balance of up to 15 per cent is treated as deemed accumulated.

3. Specified Income and Violations

• Specified income, s.337. Taxed at 30 per cent: anonymous donations above the higher of 5 per cent of total donations and Rs 1 lakh (with exceptions for wholly religious bodies), income applied for the benefit of related persons, investments outside the permitted modes, and application outside India or for non-charitable purposes.
• Violations, ss.351, 353. Specified violations, such as non-genuine activities, application for a particular community, or unauthorised commercial activity, can lead to cancellation of registration; other defaults, such as failure to keep books, get them audited or file a return, also have consequences.
• Donors, s.354 (old s.80G). Donations to approved bodies qualify for deduction in the donor's hands, supported by statements and certificates issued by the institution.

4. Leading Cases

Figure 3: The 2022 Supreme Court decisions

• ACIT (Exemptions) v Ahmedabad Urban Development Authority (19 October 2022). A three judge bench held that where a statutory or other body charges fees at or near cost, the activity is not trade or business; where receipts are substantially above cost, the activity is commercial and the entity remains exempt only if such receipts stay within the quantitative limit.
• New Noble Educational Society v CCIT (19 October 2022). A bench led by Chief Justice U.U. Lalit held that an institution claiming the education exemption must exist solely for education and not for profit, with all its objects educational; the predominant object view in earlier cases was overruled, prospectively.

5. Frequently Asked Questions

What percentage of income must a charitable trust apply to its objects?

At least 85 per cent of its regular income in the tax year, or accumulate it for specified purposes for up to five years, under ss.341 and 342 of the 2025 Act.

Can a charitable institution of general public utility run a business?

Only in the actual course of carrying out its objects, and its receipts from such activity must not exceed 20 per cent of its total receipts in the year; otherwise its exemption is lost for that year.

How are anonymous donations to a charitable trust taxed?

Anonymous donations above the higher of 5 per cent of total donations and Rs 1 lakh are specified income taxed at 30 per cent under s.337, except in the case of wholly religious bodies and certain bodies with both religious and charitable objects.

Can a trust with some non-educational objects claim the education exemption?

No. After New Noble Educational Society (2022), an institution claiming the education exemption must exist solely for education, and all its objects must relate to education; a predominantly educational purpose is not enough.

6. Related Topics

• Topic 12: Agricultural Income and Exempt Income. Other exemptions.
• Topic 19: Deductions, Rebate and the Tax Regimes. Donations by donors.
• Topic 37: Taxation of Firms, LLPs and Companies. Other special entities.