Advanced Direct Tax Laws and Practice · Computation of Total Income, Tax Liability and Filing of Returns of various Entities excluding Companies

Taxation of Trusts, Charitable and Religious Institutions

Updated 11 October 2026 · Fact-checked

A registered non-profit organisation under the Income-tax Act, 2025 pays tax on regular income only if it applies or accumulates less than 85% of that income for charitable or religious purposes. If 85% or more is applied or accumulated, taxable regular income is nil. Registration under section 332 comes first.

Understand Taxation of Trusts, Charitable and Religious Institutions

A charitable or religious trust, society or section 8 company earns income but does not work for profit. The Act gives such bodies relief, but only if they first get registered and then use their income for their stated purposes. This is the core idea: relief is earned by registration plus application of income.

Registration is dealt with in section 332. Public trusts, registered societies, section 8 companies, universities and educational institutions, institutions financed by the Government or a local authority, and certain other listed or notified persons can apply. To be eligible, the person must be constituted, registered or incorporated in India for charitable purposes or public religious purposes. Its properties must be held for the general public under an irrevocable trust, wholly for charitable or religious purposes in India. Partly is allowed only if it was constituted before the commencement of the Income-tax Act, 1961.

Once registered, tax is worked out under section 336. Take the regular income of the year. If 85% or more of it is applied under section 341 or accumulated under section 342 for charitable or religious purposes, taxable regular income is nil. If not, taxable regular income is 85% of regular income reduced by the amount applied or accumulated. So the shortfall below 85% is what gets taxed.

A public charitable trust is for the general public and can be registered. A private discretionary trust is for named or chosen beneficiaries, so it does not meet the public-benefit test and is taxed under the general trust rules, not these provisions. Keep this contrast ready for theory questions.

Political parties and electoral trusts are dealt with separately in section 12 and Schedule VIII. Certain income is left out of total income, but only if the listed conditions are met. If a condition fails in a year, that income is charged to tax for that year.

Key rules to remember

Taxable regular income, full application: If amount applied (s.341) + amount accumulated (s.342) ≥ 85% of regular income, taxable regular income = nil; Section 336(a). Application and accumulation must be for charitable or religious purposes, in that tax year.
Taxable regular income, shortfall: Taxable regular income = 85% of regular income − (amount applied + amount accumulated); Section 336(b). Used when application plus accumulation is less than 85%. Do not use 100% of income as the base.
Eligibility for registration: Constituted in India for charitable or public religious purposes + properties held for the general public under an irrevocable trust; Section 332(2). Partly charitable trusts qualify only if formed before the Income-tax Act, 1961 commenced.
Registration time limits and validity: Activities not commenced: apply during the tax year from which registration is sought, order in one month from end of month, provisional registration for three tax years. Activities commenced: order in six months from end of quarter, five tax years.; Section 332(3). Renewal applications must be made at least six months before expiry. Modification of objects: apply within thirty days.
Longer validity for smaller organisations: Five years becomes ten years if total income, before this Part, does not exceed ₹5 crore in each of the two preceding tax years; Section 332(5). It applies to cases at Sl. Nos. 3 to 7 of the Table only.
Political party conditions: Books kept + record of contributions above ₹20,000 + audit + no donation above ₹2,000 except by non-cash modes + treasurer report + return filed on time; Schedule VIII, Sl. No. 1. Cash donations above ₹2,000 break the condition. If any condition fails, income is taxed under section 12(2).
Electoral trust condition: Distribute 95% of aggregate donations received in the year, along with any surplus brought forward, to registered political parties; Schedule VIII, Sl. No. 2. The trust must also function as per rules made by the Central Government.

How to solve Taxation of Trusts, Charitable and Religious Institutions questions

Use this order for any problem or case on a charitable or religious institution.

1Identify the entity: public trust, society, section 8 company, educational institution, political party or electoral trust. This decides the provision.
2Check registration under section 332: is the entity eligible, was the application in time, is the registration still valid? Note whether delay was condoned or section 352 accreted income may apply.
3Work out the regular income for the tax year from the facts given.
4Add up the amounts applied under section 341 and accumulated under section 342 for charitable or religious purposes in that year.
5Compare the total with 85% of regular income. If it is 85% or more, taxable regular income is nil.
6If it is less, compute 85% of regular income minus the amount applied or accumulated. That is the taxable regular income.
7For political parties or electoral trusts, tick each Schedule VIII condition. A failed condition means the income is taxed under section 12(2).
8State the conclusion clearly and add compliance points such as audit, return filing and records.

Quickest way: The 85% test in three lines

When to use it: Use it for numerical questions on taxable regular income of a registered non-profit organisation.

Compute 85% of regular income.
Add application and accumulation. If that sum is at least the 85% figure, answer nil.
Otherwise, answer is 85% figure minus that sum. Quote section 336 in one line.

Common mistakes in Taxation of Trusts, Charitable and Religious Institutions

Taxing the whole shortfall against 100% of income
Students recall the old idea of applying a fixed percentage and take 100% as the base.
Fix: Under section 336 the base is 85% of regular income. Deduct application and accumulation from that figure only.
Assuming registration is automatic for any trust
The word charitable is treated as enough.
Fix: Registration under section 332 is needed to claim the benefits. Check eligibility, application time and validity before computing.
Treating a private discretionary trust like a public charitable trust
Both are called trusts.
Fix: Registration needs properties held for the general public under an irrevocable trust for charitable or religious purposes. A trust for chosen beneficiaries does not fit.
Ignoring political party conditions when income is otherwise exempt
Students think Schedule VIII gives unconditional exclusion.
Fix: Check each condition. If even one fails in the year, section 12(2) taxes that income for that year.
Mixing the validity periods
There are seven cases in the section 332(3) Table and the periods look alike.
Fix: Learn the split: three years for provisional registration, five years otherwise, and ten years under section 332(5) for qualifying smaller organisations in Sl. Nos. 3 to 7.
Missing the 95% rule for electoral trusts
Students confuse it with the 85% rule for trusts.
Fix: Electoral trusts distribute 95% of donations plus brought forward surplus to registered political parties. The 85% rule applies to registered non-profit organisations.

Worked examples

Example 1

Shree Vidya Trust, a registered non-profit organisation, has regular income of ₹40,00,000 for the tax year. It applies ₹30,00,000 for charitable purposes under section 341 and accumulates ₹2,00,000 under section 342. Find its taxable regular income.

Show the solution

85% of regular income = 0.85 × ₹40,00,000 = ₹34,00,000.
Application plus accumulation = ₹30,00,000 + ₹2,00,000 = ₹32,00,000.
₹32,00,000 is less than ₹34,00,000, so section 336(a) does not apply and section 336(b) does.
Taxable regular income = ₹34,00,000 − ₹32,00,000 = ₹2,00,000.

Answer: Taxable regular income is ₹2,00,000.

Example 2

A political party registered under section 29A of the Representation of the People Act, 1951 keeps proper books, gets accounts audited, files its return on time and its treasurer submits the required report. During the year it received a cash donation of ₹5,000 from a supporter. Is its income of the year excluded from total income?

Show the solution

Under section 12 and Schedule VIII, Sl. No. 1, income is excluded only if all listed conditions are met.
Condition (d) says no donation exceeding ₹2,000 may be received otherwise than by account payee cheque, account payee bank draft, electronic clearing or other prescribed electronic mode, or through electoral bond.
A cash donation of ₹5,000 exceeds ₹2,000 and is not in a permitted mode, so condition (d) is not satisfied.
Under section 12(2), where the conditions are not satisfied in a tax year, the income is charged to tax for that year.

Answer: No. Because condition (d) is breached, the party's income of that year is charged to tax under section 12(2). Other compliance does not cure it.

Exam tips

Write the provision first (section 332, 336 or Schedule VIII), then apply facts, then conclude. This matches the written case-based format.
In numerical answers, show 85% of regular income as a separate line. It earns method marks even if the final figure is wrong.
For registration questions, list eligibility, time limit, validity and condonation of delay. Use the section 332(3) Table in this order.
The paper is open book, so learn where the Table and Schedule VIII conditions sit, but practise stating them in your own words.
For political party questions, name the failed condition and cite section 12(2) as the consequence.

Practice questions from Computation of Total Income, Tax Liability and Filing of Returns of various Entities excluding Companies

Taxation of Trusts, Charitable and Religious Institutions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Taxation of Trusts, Charitable and Religious Institutions: frequently asked questions

What is the 85% rule for charitable trusts under the Income-tax Act, 2025?

Under section 336, taxable regular income is nil if 85% or more of regular income is applied under section 341 or accumulated under section 342 for charitable or religious purposes. Otherwise, you tax 85% of regular income less the amount applied or accumulated.

Who can apply for registration as a non-profit organisation?

Section 332(1) lists public trusts, registered societies, section 8 companies, universities and recognised educational institutions, institutions financed by the Government or a local authority, certain scheduled persons and others notified by the Board. They must also meet the eligibility test in section 332(2).

How long is registration valid?

It depends on the case in the section 332(3) Table. Provisional registration where activities have not commenced is for three tax years. Other cases are for five tax years. Section 332(5) makes five years ten years for qualifying cases in Sl. Nos. 3 to 7 where total income does not exceed ₹5 crore in each of the two preceding years.

What is the difference between a public charitable trust and a private discretionary trust?

A public charitable trust holds property for the general public for charitable or religious purposes and can seek registration. A private discretionary trust benefits chosen persons, so it does not qualify for registration as a non-profit organisation.