New Act Impact on Charitable Hospital and School Trusts 2025 — Registration, 85% Rule and Compliance
Reviewed by CA Nikhil Gupta · Last reviewed 26 September 2026
India's income tax rules for charitable organisations — hospitals, schools, religious trusts, welfare societies — were spread across Sections 11, 12, 12A, 12AA, 12AB, 13 and 10(23C) of the 1961 Act. The Income-tax Act 2025 brings them together in Part B of Chapter XVII (Sections 332–355) under the label "registered non-profit organisation". The core conditions — registration, 85% application, no benefit to related persons — remain. This guide maps the key sections and shows where exemptions are most often questioned.
Tax Exemption for Charitable Trusts — Old Sections 11–13 and 10(23C) to Chapter XVII-B
Charitable institutions — hospitals, schools, religious trusts and welfare organisations — are taxed under Part B of Chapter XVII (Sections 332 to 355) of the Income-tax Act 2025. A "registered non-profit organisation" covers bodies registered under old Sections 12A, 12AA or 12AB and institutions approved under old Section 10(23C); "registration" under Section 332 includes both.
| Old Section | New Section (2025) | Purpose |
|---|---|---|
| Sections 11 and 12 (income from property, voluntary contributions) | Section 335 (regular income), read with Sections 336 and 338 | What counts as regular income; voluntary contributions are included (Section 335(d)) |
| Corpus donations (old Section 11(1)(d)) | Section 339 (and deemed corpus, Section 340) | Treatment of corpus donations |
| Sections 12A / 12AA / 12AB (registration) | Section 332 | Application for registration, validity and renewal |
| Section 11(1) application and 11(2) accumulation | Sections 341 and 342 | 85% application rule; accumulation for up to five years |
| Section 13 (benefit to specified persons, etc.) | Section 337 (specified income); Sections 351 and 353 (violations) | Income applied for a related person is taxable as specified income (Section 337(2)) |
| Section 10(23C) — approved universities, hospitals, institutions | Section 332 (approval now part of registration) | Same regime as registered trusts |
The 85% Application Rule — Unchanged but Clarified
The core condition for exemption: at least 85% of regular income must be applied for charitable or religious purposes in India in the tax year. Under Sections 341 and 342 of the new Act:
- 85% application requirement (Section 341(5)) — the same test as old Section 11; a shortfall can be treated as deemed application in limited cases, at the organisation's option
- Accumulation: income can be accumulated or set apart for up to five years by filing a statement (Form 109, earlier Form 10) on or before the return due date, and must be invested in the modes allowed by Section 350 (Section 342)
- Corpus donations: corpus donations received are dealt with in Section 339; a corpus donation paid to another registered non-profit organisation does not count as application (Section 341(3)(c))
- Borrowed funds: application out of a loan counts only when the loan is repaid, within five years (Section 341(2)(b))
Illustration: Charitable Hospital — Salary Paid to a Trustee-Doctor
A trust running a 150-bed hospital receives ₹6 crore in patient revenue and ₹80 lakh in donations in Tax Year 2026-27. A trustee who is also the medical director draws a salary of ₹48 lakh. If the Assessing Officer considers part of that salary excessive, the excess can be treated as income applied for the benefit of a related person — "specified income" under Section 337(2) (old Sections 13(1)(c) and 13(3)) — taxable in the year of application and computed as prescribed (Rule 183).
What protects the trust is evidence recorded before payment: a board resolution fixing the salary, the doctor's qualifications and duties, and market benchmarks such as salary surveys and pay at comparable hospitals. Serious or repeated violations can also affect the registration itself (Sections 351 and 353).
Lesson: Benchmark and document every payment to trustees, founders and their relatives before it is made; payments to related persons are closely examined in trust assessments.
Registration Validity and Renewal
| Category | Registration Type | Validity | Renewal Deadline |
|---|---|---|---|
| New organisation (activities not started) | Provisional registration — Section 332 (Form 104) | 3 years | Apply for regular registration before it expires |
| Regular registration | Section 332 (Form 105) | 5 years; 10 years where total income (before this Part) did not exceed ₹5 crore in each of the two preceding tax years (Section 332(5)) | At least 6 months before expiry |
| Change in objects | Fresh application under Section 332 | As granted on the fresh application | Within 30 days of adopting or modifying the objects |
Charitable Trust Compliance Checklist
- Valid registration under Section 332 (or a carried-over 12A/12AB/10(23C) registration) — check the expiry date and renew at least 6 months early
- Apply at least 85% of regular income in India for charitable or religious purposes in Tax Year 2026-27
- Maintain separate books for corpus fund and revenue fund
- Return: ITR-7 for AY 2026-27 is due 31 October 2026 for audit cases; from Tax Year 2026-27 the return is filed under Section 349
- Accumulation: file the statement (Form 109, earlier Form 10) on or before the return due date
- Benchmark payments to trustees, founders and relatives — the Section 337(2) related-person risk
- Audit: required where total income before the exemption exceeds the basic exemption limit (Section 348); audit report in Form 112 (replacing Forms 10B/10BB)
Frequently Asked Questions
Source and review trail
Use the current official instrument, portal or regulator publication before acting. This panel separates the category authority from page-specific references.
- Primary category
- Income Tax
- Official starting point
- www.incometax.gov.in
Page source links
The prior page did not embed a page-specific external source. The category authority above is the minimum verification starting point; a specific instrument should be added when available.
Primary sources & related provisions
Statutory provisions referenced in this guide: