Section 342 of the Income-tax Act, 2025 — Accumulated Income of a Non-Profit Organisation (Trusts & NGOs)

In plain language

What Section 342 is about

Every registered non-profit organisation (NPO) — a charitable or religious trust, society or Section 8 company that holds valid registration under the Income-tax Act, 2025 — is normally expected to apply (spend) at least 85% of its regular income on its charitable or religious objects during the year. But real life is not that tidy. A hospital trust may be saving up over a few years to build a new wing; an education society may be collecting funds for a hostel. Section 342 is the provision that lets an NPO deliberately hold back (accumulate or set apart) more than the usual 15% for a specific stated purpose, and still keep its tax exemption — provided it follows a set of conditions.

In plain terms, Section 342 is the rulebook for "specific-purpose accumulation" (also called discretionary accumulation). It is the 2025 Act's successor to the well-known Section 11(2) and 11(3) of the Income-tax Act, 1961.

Who it applies to

• Registered NPOs only — trusts, societies and institutions holding registration under the 2025 Act's NPO regime. Unregistered bodies cannot use it.
• NPOs that cannot, or do not wish to, spend 85% of their income in the current year and want to carry forward the unspent amount for a defined future project.

Key conditions and limits

• File a statement in advance: The NPO must furnish a statement to the Assessing Officer (widely reported as Form No. 109) on or before the due date for filing the return of income under Section 263(1). This is not optional paperwork — miss the deadline and the accumulation can be disallowed.
• State the purpose and the period: The form must specify the charitable/religious purpose for which the income is being set apart, and the period, which cannot exceed five years. (Any period a court order or injunction stalls the spending is excluded from these five years — Section 342(3).)
• Park the money in approved modes: The accumulated income must be invested or deposited only in the modes permitted under Section 350 (read with Schedule XVI) — the same "safe" list (government securities, scheduled-bank deposits, approved bonds, etc.) — or actually applied for the stated purpose (Section 342(4)).
• Transfers to another NPO are restricted: Under Section 342(2), if an NPO passes its accumulated income to another registered NPO, that payment is not treated as valid application. This blocks a trust from "parking" accumulated funds by simply donating them onward.

Changing the purpose or dissolving

• Change of purpose (Section 342(5) & (6)): If circumstances change, the NPO can apply to the Assessing Officer to divert the accumulated income to a different charitable or religious purpose. The AO may allow it, so long as the new purpose is a genuine charitable/religious object in India.
• Dissolution (Section 342(7)): If the NPO is wound up, the AO may, on application, permit the accumulated income to be handed over to another registered NPO in the year of dissolution — so the corpus stays within the charitable sector.

How it interacts with related sections

• Section 341 defines what counts as "application" of income (spending on objects, up to 100%).
• Section 343 gives the automatic 15% "statutory accumulation" — the standard buffer every NPO gets without any form. Section 342 is the extra, purpose-driven accumulation on top of that mechanism.
• Section 336/337 — if the Section 342 conditions are breached (money not spent within five years, used for a non-charitable purpose, or not kept in Section 350 modes), the amount becomes "specified income" taxable at a flat 30% under Section 337, in the year of default or the year following the expiry of the accumulation period.
• Section 350 / Schedule XVI — the permitted-investment list.

Practical implications

• Treat Form 109 as a hard, pre-return-deadline compliance step — many exemptions have historically been lost purely because the statement was late or the purpose was vaguely worded.
• Keep the accumulated funds ring-fenced in Section 350 modes; a lapse in the mode of investment alone can trigger the 30% tax.
• Track the five-year clock project by project. Unspent balances at the end of year five are taxed — there is no automatic extension except for court-ordered delays.