Section 11

Once an NPO is registered and tax-exempt, one question decides how much of its income actually stays tax-free: how much of it did the NPO actually spend on its own charitable objects? Section 11 of the Income Tax Act answers this.

Section 11 exempts income an NPO earns from property it holds, provided the NPO applies at least 85% of that income, during the year, towards its stated objectives.

If an NPO applies less than 85% — whether by choice, because the income was not actually received, or for another genuine reason — it is not automatically taxed on the shortfall. It can instead accumulate the unspent amount, and apply it later, within a set time limit.

Section 11 exemption is not unconditional. It comes with restrictions on business income, on activities that look like trade or commerce, and on donations without an identifiable donor.

The core rule, per the workbook (Chapter 10, section 10.3):

• Apply at least 85% of property income to the NPO's objectives during the year.
• If application falls short of 85%, the NPO can accumulate the shortfall, to be applied within a maximum of 5 years.
• To exercise this accumulation option, the NPO must file specific forms on or before the due date of filing its income tax return, and invest the accumulated amount in specified investments.
• Expenditure can be claimed only when sums are actually paid, not merely committed.
• Corpus donations — money given with a specific direction that it form part of the corpus — are exempt, but must themselves be invested in specified investments.

Where Section 11 exemption does not apply:

• Income from a business, unless that business is incidental to the NPO's own charitable objects, with separate books of account kept for it.
• For an NPO with a "general public utility" object, income from trade, commerce, business or a related service is taxable if receipts from that activity exceed 20% of total receipts in the year, unless the activity is itself part of carrying out the charitable advancement.
• Anonymous donations — where the donor's identity is not available — are taxed at a flat 30%, for any charitable NPO not established wholly for religious purposes.

Capital gains are exempt if reinvested in other capital assets.

Illustrative figures, applying the workbook's own 85% rule.

Prabodh Trust earns Rs 40 lakh of property income in a financial year. To keep the full amount exempt under Section 11, it must apply at least 85% × Rs 40 lakh = Rs 34 lakh to its charitable objects that year.

Say Prabodh Trust actually applies only Rs 28 lakh (70%), because a large grant it expected arrived late. The shortfall — Rs 6 lakh — is not immediately taxed. Prabodh Trust files the required accumulation forms by its return-filing due date, invests the Rs 6 lakh in specified investments, and has up to 5 years to actually apply it to its objects.

Had Prabodh Trust instead run a small unrelated printing business earning Rs 3 lakh, against Rs 40 lakh of total receipts (7.5% of the total, below the 20% threshold, and incidental to its charitable work with separate books kept), that income could remain within the Section 11 exemption too.

Chapter 10 (Taxation), section 10.3, sets out Section 11's 85% application-of-income rule, the 5-year accumulation window, the business-income restrictions, the 20% receipts threshold, and the 30% flat tax on anonymous donations. Chapter 10's first sample question directly asks which section exempts income from NPO-held property. Expect a numerical question requiring the 85% calculation.

• 85% must be applied, not merely earned or received — a shortfall must be accumulated and applied within 5 years, not simply ignored.
• Section 11 is about the NPO's own income tax exemption; Section 80G is about the donor's deduction — the subject of Chapter 10's own first sample question.
• The 20% threshold applies to receipts from trade/commerce/business activity, for a "general public utility" object.
• For the fuller detail on the 85% rule, the 5-year window, and corpus/anonymous donations, see the dedicated Application of income, Accumulation of income, Corpus donation and Anonymous donation pages.