Section 338 of the Income-tax Act, 2025 — Income Not to Be Included in Regular Income of a Non-Profit Organisation

In plain language

What Section 338 actually says

Section 338 of the Income-tax Act, 2025 (effective 1 April 2026) is a short but important carve-out provision in the new chapter that governs Registered Non-Profit Organisations (RNPOs) — the new statutory name for what we used to call charitable and religious trusts, societies, Section 8 companies and similar institutions.

When an RNPO computes its "regular income" for a tax year (the pool of income that must then be applied or accumulated for charitable/religious purposes under Section 336), Section 338 says two specific categories of income shall NOT be included at all in that regular income. In plain terms, this income is kept entirely outside the tax computation of the trust.

The two exclusions under Section 338

• Clause (a) — Income applied outside India (with CBDT approval): Income that is applied outside India is excluded, but only where the Board (CBDT) — by a general or special order — directs that it should not be included. This is narrow: it covers organisations created before 1 April 1952 for charitable or religious purposes, and organisations created on or after 1 April 1952 for charitable purposes where the foreign application promotes international welfare in which India is interested.
• Clause (b) — Corpus donations under Section 339: Voluntary donations received with a specific written direction from the donor that they shall form part of the corpus (permanent capital) of the RNPO are not treated as regular income — provided the corpus is invested or deposited in the permitted modes under Section 350.

Who this applies to

• Only Registered Non-Profit Organisations — entities registered under Section 332 of the 2025 Act (the successor to Section 12A/12AB and Section 10(23C) registrations).
• The foreign-application relief (clause a) applies to a very small set of institutions — either very old (pre-1952) trusts, or those engaged in genuine international-welfare work aligned with India's interest. An ordinary domestic NGO cannot simply spend money abroad and claim exclusion.
• The corpus-donation relief (clause b) applies to every RNPO that receives properly directed corpus gifts and parks them in Section 350 modes.

Why this matters — the link to the 85% application rule

Under Section 336, an RNPO must apply at least 85% of its regular income to charitable/religious purposes in India to stay exempt; the balance can be accumulated subject to conditions. Because corpus donations are removed from "regular income" by Section 338, the 85% spending obligation does not attach to them. This is the whole point of corpus donations — they build a permanent endowment that need not be spent immediately, so long as it is invested in approved modes.

Key conditions and traps

• Written donor direction is mandatory for corpus treatment. A vague or oral instruction will make the receipt an ordinary voluntary contribution (regular income) that must be applied.
• Investment in Section 350 modes is a condition, not optional. If corpus money is invested outside permitted modes, the protection can be lost and the amount can become specified income taxed at 30% under Section 337.
• Foreign application needs an actual CBDT order — general or special. Without the order, income spent abroad is not excluded and does not count towards the 85% application in India.
• Post-1952 religious trusts do not get the foreign-application relief — only charitable-purpose international-welfare activity qualifies.

Practical implications

• Trusts should issue separate corpus receipts and maintain a distinct corpus ledger, backed by the donor's written letter.
• Corpus funds should be traceable into a permitted Section 350 investment (government securities, scheduled bank deposits, specified mutual funds, etc.).
• Organisations doing cross-border charitable work (disaster relief, international scholarships, welfare of Indians abroad) should apply to the CBDT for the appropriate order before relying on clause (a).