Indian NGO income tax - what's taxable, what's exempt

A 12A-registered charitable trust enjoys broad income-tax exemption under Section 11. But "exempt" doesn't mean "ignore tax altogether" - certain receipts are explicitly taxable, business income has special rules, and breaking specific guardrails costs you the entire exemption. This guide walks the taxable/exempt landscape and how each line item flows in ITR-7.

The starting point - Section 11

Per §11(1), the income of a charitable / religious trust is exempt to the extent it is applied for charitable / religious purposes in India, AND the trust applies at least 85% of its income in the year of receipt. See our §11 85% guide.

The remaining 15% can be accumulated indefinitely without tax. Any income beyond 15% that isn't applied or formally accumulated under §11(2) becomes taxable.

Exempt income (categorised)

1. Voluntary contributions (with PAN)

Donations from identified donors - fully exempt under §11 subject to 85% application. Includes:

• Cash, cheque, NEFT, RTGS, UPI donations
• In-kind donations (food, books, equipment) - valued at fair market value
• CSR donations from Indian companies
• Donations from individual donors
• Foreign contributions (subject to FCRA compliance)

2. Corpus donations

Per §11(1)(d): donations specifically directed by the donor to the trust's corpus are not income. They sit in the corpus account in perpetuity. Conditions:

• Donor must give written instruction (letter, email, deed)
• Donation must be deposited and invested in §11(5) modes
• Corpus cannot be applied as income; only the interest / income generated by the corpus is income

Many NGOs route 10-30% of major gifts to corpus - builds endowment, doesn't go in the 85% calculation.

3. Income from §11(5) investments

Bank FD interest, government securities, debt mutual funds, gilt funds - exempt subject to 85% application. The same income, if from a non-§11(5) investment, is taxable AND triggers loss of §11 exemption.

§11(5) allowed modes (Rule 17C):

• Government securities
• Scheduled bank deposits (FD, RD)
• Post Office time deposits
• Debt mutual funds (income-only schemes)
• Specified UTI units
• Public-sector company debentures
• Specified housing-finance company deposits

NOT allowed: equity shares (except via certain mutual funds), private-company debentures, private investments, real estate as investment.

4. Capital gains on programme assets

Per §11(1A): if you sell a programme asset (e.g., a school building you no longer need) and reinvest the proceeds in another programme asset, the capital gain is exempt. Conditions:

• Reinvestment within 6 months of sale
• New asset must be a programme asset (not investment)
• Asset must be held for charitable purpose

Failure to reinvest within 6 months: capital gain becomes taxable at LTCG rates.

5. Income applied outside India

Per §11(1)(c): exempt only if the activity is for the welfare of India or specifically approved by CBDT. Common examples:

• Training programmes outside India for Indian beneficiaries (e.g., medical training for Indian doctors at a Bangkok institution)
• Disaster relief in neighbouring countries with explicit CBDT approval

Without CBDT approval, application outside India is treated as non-application - counts against the 85% test.

Taxable income (despite 12A status)

1. Anonymous donations under §115BBC

Anonymous donations are donations where the donee doesn't have donor name + address. Treatment:

• Anonymous donations up to 5% of total donations OR ₹1,00,000 (whichever is higher) - exempt
• Excess above the threshold - taxed at 30% flat under §115BBC, no deductions allowed

Exception: religious trusts and trusts established for benefit of SC/ST/EWS/backward classes are exempt from §115BBC entirely.

2. Business income - the §11(4A) test

If the trust runs an "incidental business" (e.g., a hospital that charges patients, a school that charges fees), the income is exempt only if:

• The business is incidental to the attainment of the trust's objects (hospital for a healthcare trust; school for an education trust)
• Separate books of account are maintained for the business
• The income is applied for the trust's charitable purposes

"Non-incidental" business income (e.g., a charity running a profitable restaurant) is fully taxable at corporate rates and triggers loss of §11 across the board if the business is "non-charitable in nature".

3. Property income from non-charitable use

If trust property is let out for a non-charitable purpose (e.g., renting commercial space in your hospital building to a private cafe), the rental income is taxable.

4. Income from §13-violating activities

Section 13 lists situations where §11 exemption is denied for that FY:

• §13(1)(a): Trust income used for benefit of a particular religious community (except religious trusts).
• §13(1)(b): Trust established after 1 April 1962 for benefit of any caste/community.
• §13(1)(c): Trustees / specified persons receiving direct benefit (loans, contracts, salary beyond reasonable limits, sale at concessional price, etc.).
• §13(1)(d): Investments in non-§11(5) modes.

Hit any of these and the entire trust income for the FY is taxed at maximum marginal rate (~40-43% including surcharge).

5. Excess application above 85% being treated as deemed income in future

If you applied 95% in FY 1 but only 70% in FY 2, the FY 2 shortfall (15%) becomes taxable unless you file Form 10 for accumulation election. Excess from FY 1 doesn't carry forward to FY 2.

Taxation rates - comparison

Computing taxable income - worked example

NGO ABC, 12A-registered, FY 2025-26:

• Voluntary contributions: ₹2 crore
• Corpus donations: ₹50 lakh
• Bank FD interest (§11(5) compliant): ₹15 lakh
• Hospital fees from poor-class patients (incidental business): ₹40 lakh
• Rental income from a commercial floor in the hospital building: ₹12 lakh
• Anonymous cash donations at the entrance counter: ₹8 lakh
• Total expenses applied for charitable purposes: ₹2.1 crore

Income computation:

• Voluntary + interest + incidental business income = ₹2 cr + ₹15 lakh + ₹40 lakh = ₹2.55 cr (all "income" under §11)
• Corpus ₹50 lakh - not income; sits in corpus
• Rental ₹12 lakh - non-charitable use, taxable separately
• Anonymous ₹8 lakh - threshold = max(5% of ₹2 cr, ₹1L) = ₹10 lakh. Anonymous ₹8 lakh is below threshold, so fully exempt

§11(1)(a) test: 85% of ₹2.55 cr = ₹2.17 cr. Applied = ₹2.1 cr. Shortfall ₹7 lakh.

Outcome: Trust must either file Form 10 accumulating the ₹7 lakh, OR pay tax on the ₹7 lakh at slab rates. Plus pay tax on ₹12 lakh rental at slab rates.

What ITR-7 looks like for an NGO

ITR-7 is filed by trusts, political parties, scientific research associations, etc. Charitable-trust filing flows through:

• Part A-GEN: NGO basic details + 12AB info + auditor details
• Schedule J: Information about voluntary contributions
• Schedule LA: Section 11 income computation + 85% test
• Schedule K: Application of income - programme + admin breakdown
• Schedule HP / BP / CG / OS: House property / business / capital gains / other sources (if any)
• Schedule TR: Tax reliefs / TDS
• Part B-TI: Total income computation
• Part B-TTI: Tax computation

See our ITR-7 guide for full schedule-by-schedule walkthrough.

Common mistakes

1. Treating corpus donations as income. Inflates income; makes 85% harder; pays unnecessary tax.
2. Not maintaining separate books for incidental business. §11(4A) requires it; absence = loss of business-income exemption.
3. Investing in non-§11(5) modes. Equity shares, private-company debentures - all trigger §13(1)(d) violation.
4. Anonymous donations not reported. Auditor catches at audit time; tax + interest accrues.
5. Trustee benefit unreported. §13(3) requires disclosure of any specified-person dealings. Hidden ones discovered in scrutiny = entire year's income loses exemption.
6. Forgetting Form 10 for accumulation. Trust under-applied; should have filed Form 10 to defer the shortfall; didn't; now must pay tax.

Frequently asked questions

Is depreciation deductible? Yes for trust assets used in incidental business (§11(4A)). Programme assets: depreciation isn't an "application" - but historical purchase is.

Are NRI donations taxable? NRI donations to a 12A trust are voluntary contributions like any other. Not foreign contribution (FCRA doesn't apply). Exempt subject to 85% application.

Are donor reimbursements (e.g., to volunteers) taxable? Reimbursements aren't income to the recipient under §10(14)(i) if backed by actual expense vouchers. Not taxable.

Does the new tax regime apply to NGOs? No. §115BAA / §115BAB (concessional regimes) are for companies. Trusts follow the slab regime, which is moot if §11 exemption applies.

What if the NGO has loss? Loss can be carried forward 8 years against future taxable income. Most charitable trusts don't carry losses since §11 exempts the bulk of income.