New Act Impact on Charitable Hospital and School Trusts 2025 — Registration, 85% Rule and Compliance
India's income tax framework for charitable organisations — hospitals, schools, religious trusts, welfare societies — has always been complex, spread across multiple sections with conditions and provisos. The Income-tax Act 2025 consolidates all these into a cleaner Chapter XII-GA (Sections 300–330), but the underlying conditions — 85% application rule, no benefit to trustees, registration requirement — remain intact. This guide maps every key change, explains what trusts must do by 30 September 2026, and uses a real-world hospital case to show where exemptions get denied.
Tax Exemption for Charitable Trusts — Section 10(23C) to New Chapter
Charitable institutions — hospitals, schools, religious trusts, and welfare organisations — operate under special income tax exemption provisions. The Income-tax Act 2025 consolidates these into Chapter XII-GA (Sections 300–330), restructuring what was earlier scattered across Sections 11, 12, 12A, 12AA, 12AB, 10(23C), 13, and related sections of the old Act.
| Old Section | New Section (2025) | Purpose |
|---|---|---|
| Section 11 (income from property) | Section 302 | Income exemption for registered trusts |
| Section 12 (voluntary contributions) | Section 303 | Donations to corpus not taxable |
| Section 12A (registration) | Section 310 | Registration requirement for exemption |
| Section 12AB (provisional/final registration) | Section 311-312 | Registration validity and renewal |
| Section 13 (denial of exemption) | Section 315 | Conditions under which exemption is denied |
| Section 10(23C) — specified entities | Section 300-301 | University, hospital, educational institutions |
The 85% Application Rule — Unchanged but Clarified
The core condition for exemption: at least 85% of the trust's income must be applied for charitable purposes in India in the year. Under Section 302 of the new Act:
- 85% application requirement — unchanged from old Section 11
- Accumulated income (up to 15%) can be set aside for specific purposes for up to 5 years — must be indicated in writing to the AO
- Corpus donations received: not income, cannot be applied to meet the 85% — the Act clarifies this under Section 303
- Application outside India: only if the trust's objects specifically cover application abroad AND CBDT has notified the category
Case Study: Charitable Hospital — Section 315 Denial of Exemption
Surya Charitable Trust runs a 150-bed hospital. In Tax Year 2026-27, it received ₹6 crore in patient revenues and ₹80 lakh in donations. The Trust trustee (who is also the Managing Doctor) drew a salary of ₹48 lakh — which the IT Department alleged was "unreasonable" under Section 315(3)(c) (old: Section 13(3)(c)) — diverting income for the benefit of a trustee.
The Trust argued that ₹48 lakh was market-rate salary for a senior surgeon/MD — supported by salary surveys and AIIMS benchmarks. The CIT(A) upheld the Trust's position: the salary was reasonable given qualifications and responsibilities. Section 315 denial was reversed. Key documentation saved the Trust from paying tax on entire ₹6.8 crore.
Lesson: Always benchmark trustee/employee salaries to market rates and document the basis. The "unreasonable benefit" ground under Section 315 is the most commonly used by AOs to deny trust exemptions.
Registration Validity and Renewal
| Category | Registration Type | Validity | Renewal Deadline |
|---|---|---|---|
| New trust (first time) | Provisional registration — Section 311 | 3 years | Apply 6 months before expiry |
| After provisional — regular | Final registration — Section 312 | 5 years | Apply 6 months before expiry |
| Trusts with significant modification (change in objects) | Fresh registration — Section 311 | Fresh 3-year provisional | Within 30 days of modification |
Charitable Trust Compliance Checklist
- Valid Section 311/312 registration — check expiry date and renew 6 months early
- Apply at least 85% of income in India for charitable purposes in Tax Year 2026-27
- Maintain separate books for corpus fund and revenue fund
- Annual return in ITR-7 — due by 31 October 2026 for audit cases
- Form 10 — application for accumulation of income (if 15% is being accumulated) — file before year-end
- Ensure trustee/employee salaries are benchmarked — avoid Section 315 denial trigger
- Audit under Section 194 — required if gross receipts exceed ₹1 crore (for hospitals/educational institutions)