Accumulation of Income

Introduction

Under the Income Tax Act, 2025, the NPOs that are registered under Section 332 are allowed to accumulate income under certain conditions. This is mainly to ensure that funds can be used for long-term or specific projects, rather than being forced to spend everything in the year of receipt. Generally, NPOs must apply at least 85% of their income (including voluntary donations, grants etc.) towards charitable or religious purpose in India in the same tax year. If they apply less than 85%, the remaining amount can be accumulated.

Deemed application (Section 341(5), (6) & (7)):

If the whole or any part of the income has not been actually received during the relevant tax year, the NPOs have the option to apply such income for the intended charitable or religious purposes

• In the year in which the income is actually received, or
• In the immediately following tax year.

Further, if the NPOs have received the income during the relevant tax year but fails to apply the whole or any part of it for the specified purposes, they are allowed to apply such unutilized income in the immediately following tax year.

However, to avail the above options, the NPOs must exercise the choice by filing Form No.108. This form must be submitted electronically to the Assessing Officer on or before the due date specified in section 263(1) for furnishing the return of income for such tax year.

Specific Accumulation (Section 342)

When an NPO fails to apply at least 85% of its income towards charitable or religious purposes during a tax year, it is permitted to accumulate or set aside the unutilized portion of the income for future application. Such accumulated income will not be included in the total income of the trust, provided the following conditions are fulfilled:

• Filing of Form No. 109: The NPO must submit Form No. 109, giving notice of the accumulation of income, electronically to the Assessing Officer before the due date for filing the return of income under Section 263(1).
• Purpose of Accumulation: The specific purpose(s) for which the income is being accumulated or set aside must be clearly stated in Form No. 109.
• Time Limit for Accumulation: The income can be accumulated for a maximum period of five years. However, any tax year during which the income could not be applied due to an order or injunction of any court shall be excluded from the computation of this five-year period.
• Investment of Accumulated Funds: The accumulated or set-aside income must be invested or deposited only in the specified modes as specified in Schedule XVI under Section 350 of the Income Tax Act, 2025.

Note: The amount credited or paid by a registered non-profit organisation to any other registered non-profit organisation out of its income accumulated or set apart, shall not be treated as application of income.

Procedure for filing Form No.109

The organisation desiring to accumulate funds under section 342(1) must give a notice in writing to the Assessing Officer of its intention and reasons for such accumulation in Form No. 109 online under Rule 185 of the Income Tax Rules 2026. Following enclosures and details should be submitted with online Form No. 109:

• A resolution has to be passed by the governing body of the organisation.
• For accumulation of income, it is necessary that the NPO must indicate specific purpose or purposes for which it wants to accumulate the funds. A general decision to accumulate listing all the objects of the organisation would not be sufficient.
• Audit Report in Form No. 112 under section 348, the applications out of these accumulations must be shown separately and there are separate schedules for the disclosures.

Consequences of not meeting the conditions of Accumulation

If the following conditions are not met, the accumulated income becomes taxable in the hands of the organization.  All the conditions are placed to ensure the genuine application of accumulated funds.

• Not used for specified purpose within 5 years or sub granted to other entities
• Applied to purpose other than specified
• Ceases to accumulate or invest the specific accumulated as specified in Schedule XVI under section 350
• Not utilized due to merger or dissolution of the organization

Summary