Income Tax 2025

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Accumulated income. ​

342(1) ​

A registered non-profit organisation may accumulate or set apart any part of its regular income during any tax year by furnishing a statement to the Assessing Officer in such form and manner, as prescribed, on or before the due date specified in section 263(1) for furnishing the return of income for such tax year stating therein the purpose and period, not exceeding five years, for which the income is being accumulated or set apart

342(2) ​

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.

342(3) ​

The period during which the income is not be applied for the purpose for which it is so accumulated or set apart pursuant to an order or injunction of any court, shall be excluded from said period of five years.

342(4) ​

The income accumulated or set apart under sub-section (1) shall be invested or deposited in any of the modes permitted under section 350, or applied for the purposes as stated in the prescribed form referred to in sub-section (1).

342(5) ​

The registered non-profit organisation may, for the change of purpose for which income has been accumulated or set apart, make an application to the Assessing Officer, in such form and manner, as prescribed.

342(6) ​

The Assessing Officer may, on an application under sub-section (5) and subject to sub-section (2), allow the registered non-profit organisation to apply its income for such other charitable or religious purposes in India which are in conformity with its objects.

342(7) ​

Where a registered non-profit organisation is dissolved, the Assessing Officer may, on an application made by such registered non-profit organisation in such form and manner, as prescribed, allow application of such income to be made to any other registered non-profit organisation for the year in which it is dissolved.

Explanation

Section Summary: ​

Section 342 of the Income Tax Act governs how registered non-profit organizations (NPOs) can accumulate or set aside a portion of their income for future use. It outlines the conditions, reporting requirements, and restrictions on how such accumulated income can be used, ensuring compliance with tax-exempt purposes.

Key Changes: ​

  1. Formal Reporting Requirement: NPOs must now furnish a statement to the Assessing Officer, specifying the purpose and period (up to five years) for which income is being accumulated or set aside. This formalizes the process compared to earlier practices.
  2. Restriction on Transfers: Income transferred to another NPO cannot be treated as "application of income," meaning it doesn’t count toward fulfilling the NPO’s spending obligations.
  3. Court-Ordered Exclusions: If a court order or injunction prevents the use of accumulated income, the restricted period is excluded from the five-year accumulation limit.
  4. Investment Rules: Accumulated income must be invested or deposited in modes permitted under Section 350 or used for the stated purpose.
  5. Change of Purpose: NPOs can apply to change the purpose for which income was accumulated, subject to approval by the Assessing Officer.
  6. Dissolution Provisions: If an NPO dissolves, it can apply to transfer its accumulated income to another NPO, subject to approval.

Practical Implications: ​

  1. For NPOs:

    • Must file a detailed statement with the Assessing Officer to accumulate income, ensuring transparency.
    • Cannot use transfers to other NPOs as a way to meet spending requirements.
    • Must invest accumulated income in permitted modes or use it for the stated purpose within five years (excluding court-ordered delays).
    • Can seek approval to change the purpose of accumulated funds or transfer them upon dissolution.

  2. For Tax Authorities:

    • Enhanced oversight of NPOs’ income accumulation and usage.
    • Ensures funds are used for legitimate charitable or religious purposes.

Critical Concepts: ​

  1. Accumulated Income: Income set aside by an NPO for future use, rather than being spent in the current year.
  2. Application of Income: Spending income on charitable or religious purposes to maintain tax-exempt status. Transfers to other NPOs do not qualify as "application."
  3. Permitted Investment Modes: Refers to investments allowed under Section 350, such as government securities, mutual funds, or other approved instruments.
  4. Court-Ordered Exclusions: If legal proceedings prevent the use of accumulated income, the five-year limit is paused.

Compliance Steps: ​

  1. File a Statement: Submit a statement to the Assessing Officer before the due date for filing the income tax return, detailing the purpose and period (up to five years) for accumulating income.
  2. Invest or Use Funds: Ensure accumulated income is either invested in permitted modes or used for the stated purpose within the specified period.
  3. Seek Approval for Changes: If the purpose of accumulated income needs to change, file an application with the Assessing Officer.
  4. Handle Dissolution: If dissolving, apply to transfer accumulated income to another NPO, ensuring compliance with the law.

Examples: ​

  1. Accumulation for Future Projects: An NPO plans to build a school in three years. It accumulates ₹50 lakh from its current income and files a statement with the Assessing Officer, specifying the purpose and period. The funds are invested in government bonds until needed.
  2. Court-Ordered Delay: An NPO accumulates ₹20 lakh for a medical camp but faces a court injunction preventing the event. The five-year accumulation period is paused until the injunction is lifted.
  3. Transfer Upon Dissolution: An NPO dissolves and applies to transfer its accumulated ₹10 lakh to another NPO working on similar charitable goals. The Assessing Officer approves the transfer.

This section ensures NPOs use their income responsibly while maintaining their tax-exempt status.