Indian income tax | Charitable and religious institutions

Income Tax Assessment of Charitable Trusts and Religious Institutions in India

How charitable and religious trusts calculate income, apply funds to their objects, set aside or accumulate income, account for corpus donations and capital gains, and comply with the applicable income tax law.

Current legal framework: The Income-tax Act, 2025 came into force on 1 April 2026. The Income-tax Act, 1961 continues to matter for earlier assessment years and transition matters. References to sections 11, 12, 12AB and 13 below describe the established 1961 Act provisions; for tax year 2026-27 onwards, use the corresponding provisions and forms under the 2025 Act and Income-tax Rules, 2026. See the official text of the Income-tax Act, 2025 and official transition FAQs.

1. Meaning of income of a charitable or religious institution

Income for a charitable or religious trust may include rent, interest, dividends, business receipts, capital gains and voluntary contributions. Under section 2(24)(iia) of the Income-tax Act, 1961, voluntary contributions received by eligible trusts and institutions are included in the statutory definition of income. Section 12 treats non-corpus voluntary contributions as income derived from property held under trust for purposes of section 11.

A trust may be wholly charitable, wholly religious, or partly charitable and religious. Its eligibility for relief depends on its objects, registration, use of funds and applicable statutory restrictions, not merely on its name or legal form.

Corpus donations

A corpus donation is a voluntary contribution accompanied by a specific direction from the donor that it form part of the trust's corpus. Under the 1961 Act framework, section 11(1)(d) provides conditional exemption for such contributions, including the requirement that corpus amounts be invested or deposited in prescribed modes and maintained specifically for the corpus. An unrestricted donation is not automatically a corpus donation.

2. Application of income for charitable or religious purposes

Application of income means deploying eligible income towards the institution's charitable or religious objects. Under section 11(1) of the 1961 Act, subject to the prescribed conditions, at least 85% of eligible income generally must be applied to qualifying purposes in India, while up to 15% may ordinarily be retained without the special accumulation procedure. The 15% is a permitted accumulation, not an expense incurred.

Examples of qualifying application may include educational activities, medical relief, poverty relief, religious activities consistent with the trust's objects, and legitimate administrative costs attributable to those activities. Payments benefiting specified interested persons, non-compliant investments and other prohibited transactions can jeopardize exemption.

Under the 1961 Act, payments to another eligible registered institution generally count as application only to the extent allowed by the applicable provisions; corpus contributions to another trust do not count as application. Borrowed-fund expenditure and replenishment of corpus have special rules. The treatment of expenditure must be checked against the applicable tax year.

3. Setting apart and accumulating income

Category	General treatment under the 1961 Act framework
Ordinary retention	Up to 15% of eligible income may generally be accumulated without a special purpose-specific application.
Specific accumulation	Section 11(2) permits additional accumulation for specified charitable or religious purposes, generally for a period not exceeding five years, subject to prescribed filing and investment conditions.
Deemed application	Where qualifying income could not be applied because it was not received or for another permitted reason, an election may be available subject to the prescribed time and conditions.

For years governed by the 1961 Act, Form 10 is associated with purpose-specific accumulation and Form 9A with deemed application. Applicable deadlines and forms can differ for later years under the 2025 Act. Money accumulated for a specified purpose must be invested in permitted modes and used within the allowed period; diversion or non-use may trigger taxation.

4. Capital gains on property held under trust

Section 11(1A) of the 1961 Act provides a special deemed-application mechanism when a trust transfers a capital asset and uses the net consideration to acquire another capital asset held for qualifying purposes. Broadly, use of the entire net consideration can allow the entire eligible capital gain to be treated as applied; partial reinvestment may allow only a proportion determined by the statutory formula. Net consideration means sale consideration less qualifying transfer expenses. The replacement asset and timing must satisfy the applicable provisions.

5. Business income and incidental business

Section 11(4) of the 1961 Act recognizes that property held under trust can include a business undertaking. The Assessing Officer may determine its income under ordinary business-income provisions, and differences between the determined income and the amount reflected in the accounts may affect the application calculation.

Section 11(4A) restricts exemption for business income unless the business is incidental to the attainment of the trust's objectives and separate books of account are maintained for that business. Merely using business profits for charity does not by itself establish that the business qualifies.

6. Restrictions, specified persons and services

Section 13 of the 1961 Act contains important restrictions, including private benefit to specified persons such as certain founders, trustees, substantial contributors and their relatives. The provision also addresses circumstances in which medical or educational services provided to specified persons can lead to income being treated as taxable. The exact consequence depends on the facts and relevant subsection.

Other key conditions include permitted investment modes, restrictions on certain religious or community-specific benefits, and avoidance of prohibited benefits to related parties. Registration alone does not guarantee exemption.

7. Registration, audit and annual compliance

Eligible institutions generally need valid registration or approval, proper books of account, donation records, applicable audit reports and timely income-tax returns. Under the 1961 Act, registration was governed by sections 12A and 12AB; audit reporting and donor statements used prescribed forms including Forms 10B, 10BB, 10BD and 10BE, as applicable.

For fresh applications under the Income-tax Act, 2025 from 1 April 2026, the Income Tax Department's transition guidance identifies Form 104 as the replacement for the earlier Form 10A. The Department also provides guidance for Forms 113 and 114 concerning donation statements and certificates. Existing valid approvals generally continue under transitional provisions insofar as consistent with the new law.

Always check the current form, audit threshold, due date, registration status and applicable assessment period on the Income Tax e-Filing Portal.

8. Illustrative application calculation

If an eligible trust has qualifying annual income of Rs. 10,00,000 and no special adjustments, an indicative 85% application requirement is Rs. 8,50,000 and ordinary 15% retention is Rs. 1,50,000. If only Rs. 7,00,000 is applied, the shortfall may require a valid deemed-application election or specific accumulation, if permitted, to preserve exemption. This example is simplified and is not a substitute for the statutory computation.

9. Official law and guidance

Important: This article is general information, not a determination of any institution's exemption. The applicable law, filing forms and transition rules depend on the tax year and the trust's facts. Obtain professional advice for an actual assessment or filing.