Application of income

Section 11 of the Income Tax Act exempts an NPO's income from tax — but only if the NPO actually uses that income for its charitable purpose. The workbook calls that requirement application of income.

Its own words: "The NPO is required to apply 85% of its income earned during the year towards its objectives."

85% is the threshold, not 100%. An NPO does not have to spend every rupee it earns in the same year to keep its exemption — but it does have to spend at least this much, or make a formal choice about what happens to the rest.

The workbook sets out what happens on both sides of the 85% line:

1. If application is 85% or more, the NPO's income for that year is exempt under Section 11, with no further step required.
2. If application falls below 85%, the shortfall can be accumulated for application within a maximum period of 5 years — the NPO does not lose the exemption immediately, provided it commits to spending the accumulated portion within that window.
3. A separate route exists if the shortfall is due to income not yet received, or for any other reason: the NPO can accumulate for application in the year the income is actually received, or the year immediately following.
4. Accumulation is not automatic. If the NPO wants to use either accumulation route, it must file specific forms on or before the due date of filing its return of income, and the accumulated amount must be invested in specified investments.
5. The NPO can claim expenditure only when sums are actually paid, not merely committed or budgeted — a distinction the workbook states directly: "NPO can claim expenditure only when sums are paid and not otherwise."

Illustrative figures.

Ashadeep NPO earns ₹1,00,00,000 in a financial year. To keep its Section 11 exemption on the full amount without accumulation, it needs to apply at least 85% = ₹85,00,000 to its charitable objects that same year.

It actually spends ₹72,00,000 — a shortfall of ₹13,00,000 below the 85% threshold.

Had Ashadeep simply spent ₹72,00,000 with no accumulation filing, it would risk losing exemption on the shortfall — the accumulation route exists precisely so a genuine timing gap does not automatically cost the NPO its tax exemption, provided it follows the filing and investment conditions.

Chapter 10, section 10.3 (Exemptions for Social Enterprises), sets out the 85% application requirement and the two accumulation routes under Section 11. Expect a numerical question computing the 85% threshold from a given income figure, and a question on the maximum accumulation period (5 years) and the filing condition attached to it.

• 85% is the threshold for full exemption without accumulation — not 100%. A question testing this figure is a very common one.
• Accumulation requires filing specific forms by the return-filing due date, and investing in specified investments — an NPO cannot simply carry the shortfall forward informally.
• 5 years is the maximum accumulation period for a general shortfall; the separate route (income not yet received) instead runs to the year of receipt or the year immediately following, which can be a different timeline.
• Expenditure is recognised only when actually paid, not when merely committed — a pledged but unpaid expense does not count toward the 85% application test.
• Do not confuse application of income with accumulation of income — application is spending income on objects; accumulation is the specific, conditional mechanism for carrying forward a shortfall in that spending.