Chapter XVII - Special Provisions Relating to Certain Persons
Section 342
Section 342: accumulated income
Section 342 lets a registered non-profit organisation formally set aside part of its income for a stated charitable or religious purpose, for up to five years, instead of applying it immediately - provided it follows the filing and investment conditions in this section.
On this page
Need advice on Section 342?
This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(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 may be 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.
(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.
(3) The period during which the income is not 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 the said period of five years.
(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).
(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 may be prescribed.
(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.
(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 may be prescribed, allow application of such income to be made to any other registered non-profit organisation for the year in which it is dissolved.
Introduction
A registered non-profit organisation may set aside regular income for a stated charitable or religious purpose for up to five years by furnishing a prescribed statement by the return due date.
The income must be held in permitted investment modes or applied for its stated purpose; changes of purpose and dissolution require the Assessing Officer process specified here.
Key takeaways
Statement by the return due date
The organisation must furnish a prescribed statement to the Assessing Officer by its Section 263(1) return due date, stating the purpose and period of accumulation.
The stated period is at most five years
The period cannot exceed five years, excluding any time a court order or injunction prevents application for the stated purpose.
Investment and use remain controlled
The accumulated amount must be held in a Section 350 mode or applied for the purpose stated in the prescribed form.
A changed purpose needs approval
The organisation may apply to the Assessing Officer to use it for another qualifying purpose in India; Section 342 also has a special application route on dissolution.
How to accumulate income
Sub-section (1): a registered non-profit organisation may accumulate or set apart part of its regular income for a tax year by furnishing a statement to the Assessing Officer, in the prescribed form and manner, on or before the due date under Section 263(1) for filing its return of income - stating the purpose and the period (not exceeding 5 years) for which the income is being accumulated or set apart.
Rules around the accumulation
- Amounts credited or paid to another registered non-profit organisation out of accumulated or set-apart income are not treated as application of income (sub-section 2)
- Any period during which the income is not applied for its stated purpose because of a court order or injunction is excluded from the 5-year accumulation period (sub-section 3)
- Accumulated or set-apart income must be invested or deposited in a mode permitted under Section 350, or applied for the purpose stated in the prescribed form (sub-section 4)
Changing the purpose, or applying to another organisation on dissolution
Sub-section (5): the organisation may apply to the Assessing Officer, in the prescribed form and manner, to change the purpose for which income has been accumulated or set apart.
Sub-section (6): the Assessing Officer may, on such an application (and subject to sub-section (2)), allow the organisation to apply its income for another charitable or religious purpose in India that conforms with its objects.
Sub-section (7): where a registered non-profit organisation is dissolved, the Assessing Officer may, on application in the prescribed form and manner, allow the accumulated income to be applied to another registered non-profit organisation for the year of dissolution.
Step-by-step flow for accumulating income under Section 342
- 1
Does the registered non-profit organisation want to keep part of its regular income for a later purpose?
Section 342(1) lets it accumulate or set apart any part of its regular income of a tax year.
- No: Section 342 is not needed for that income.
- Yes: Go to the next step.
- 2
Furnish the statement by the return due date
The statement goes to the Assessing Officer in the prescribed form and manner, on or before the due date under Section 263(1) for that tax year. It must state the purpose and the period, which cannot exceed five years.
- 3
Hold the amount in a permitted way
Under Section 342(4), the amount must be invested or deposited in a mode permitted under Section 350, or applied for the purpose stated in the prescribed form. A payment out of it to another registered non-profit organisation is not application of income (Section 342(2)).
- 4
Has a court order or injunction stopped its use for the stated purpose?
- Yes: That period is excluded when counting the five years (Section 342(3)); go to the next step.
- No: The five years run normally; go to the next step.
- 5
Does the purpose need to change, or is the organisation being dissolved?
For a change of purpose, apply to the Assessing Officer under Section 342(5); he may allow use for other charitable or religious purposes in India that conform to its objects (Section 342(6)). On dissolution, apply under Section 342(7) to have the income applied to another registered non-profit organisation for the year of dissolution. The forms are prescribed.
Practical checklist
Do
- File the purpose-and-period statement by the section 263(1) return due date.
- Track each accumulation tranche, its five-year period and section 350 investment mode.
- Apply to the Assessing Officer before changing the accumulated purpose.
Avoid
- Treat a payment from accumulated income to another registered non-profit organisation as ordinary application without checking subsection (2).
Illustrative example
Worked example: setting aside funds for a building
Hypothetical facts (illustration only, not a real taxpayer): A registered charitable trust has regular income of ₹60,00,000 in tax year 2026-27. It applies ₹42,00,000 to its objects during the year and wants to keep ₹15,00,000 to build a hostel for students, which it expects to take four years. All amounts are assumed.
Statement
The trust furnishes the prescribed statement to the Assessing Officer before the Section 263(1) due date for tax year 2026-27, stating the hostel purpose and a period of four years, which is within the five-year limit.
Holding the money
Until it is spent on the hostel, the ₹15,00,000 is kept in a mode permitted under Section 350 (Section 342(4)).
Court injunction
A boundary dispute leads to a court injunction that stops construction for 8 months. Under Section 342(3), those 8 months are excluded when counting the five years.
Payment to another trust
If the trust instead paid the ₹15,00,000 to another registered non-profit organisation, Section 342(2) says this would not be treated as application of income.
Change of plan
If the trust later decides to use the money for a clinic instead, it must first apply to the Assessing Officer under Section 342(5); it cannot simply switch purpose.
Outcome
- Of the ₹60,00,000, ₹42,00,000 is applied and ₹15,00,000 is accumulated: ₹42,00,000 + ₹15,00,000 = ₹57,00,000. The other ₹3,00,000 is within 15% of regular income (15% of ₹60,00,000 = ₹9,00,000), so it is deemed accumulated income under Section 343.
- The accumulation is valid only if the statement is filed in time and the investment and purpose conditions are kept.
Frequently asked questions
For how long can income be accumulated under Section 342?
For a period not exceeding 5 years, as stated in the statement filed with the Assessing Officer under Section 342(1).
By when must the accumulation statement be filed?
On or before the due date under Section 263(1) for filing the organisation's return of income for that tax year.
What happens to accumulated income if the organisation dissolves?
The Assessing Officer may, on application, allow the accumulated income to be applied to another registered non-profit organisation for the year of dissolution, under Section 342(7).
Does a court injunction use up the five-year accumulation period?
No. Under Section 342(3), the period during which the income is not applied for its purpose because of a court order or injunction is excluded from the five years.
Need help applying this provision to your situation?
Get help filing your income accumulation statementLast updated 9 October 2026