When can a charity earn? Fees, sales and business income

A charity in India can earn money from fees, sales and other trading, but the Income-tax Act limits how. Every registered NGO may carry on a commercial activity only if it is incidental to its objects and kept in separate books (Section 345 of the Income-tax Act, 2025). Charities whose purpose is “the advancement of any other object of general public utility” must also keep their commercial receipts within 20% of their total receipts (Section 346).

This guide explains what counts as commercial activity, the two tests, how the Supreme Court has read them, what happens if you cross the line (which changed on 1 April 2026), and how schools, hospitals, social enterprises and Section 8 companies fit in. It is for NGO founders, boards and finance teams thinking about earned income.

Why earning money raises a tax question

A registered NGO’s income is exempt because it is applied to charitable purposes. Trading for profit sits uneasily with that, so the Act draws lines around it. The 2025 Act defines the activity it is concerned with:

The last words matter: spending the profit on good causes doesn’t stop an activity being commercial. Gains from a permitted commercial activity are part of the organisation’s regular income, so the 85% rule applies to them like any other income.

Your charitable purpose decides which rules apply

The Act’s definition of charitable purpose (Section 2(23), formerly section 2(15)) has seven parts, and the business rules depend on which one your work falls under:

General public utility is the catch-all for charitable objects outside the six named purposes. Bodies that promote sport, the arts, trade or civic development often fall here. Which category you are in depends on your objects and on what you actually do, so read your trust deed, memorandum or articles with your CA.

Rule 1: incidental to the objects, with separate books

Section 345 (formerly section 11(4A)) applies to every registered non-profit organisation. It may carry on a commercial activity only if:

1. the activity is incidental to its objects, and
2. it keeps separate books of account for that activity.

“Incidental” isn’t defined. In practice, the closer an activity is to the charitable work, the easier it is to defend: a livelihoods programme selling what its members make, a disability charity’s café that trains and employs its trainees, or the sale of a charity’s own publications. A trading business with no link to the objects is much harder to defend.

Separate books means a separate ledger or set of accounts for each activity, showing its receipts and its costs, so that anyone can see what it earned.

Breaking Section 345 remains a specified violation (Section 351(1)(b)), which can lead to cancellation of registration and the tax on accreted income. See income-tax registration.

A business held as property. Where a registered NGO holds a business undertaking as part of its property, the Assessing Officer may work out that business’s income under the normal rules, and anything above the figure in the books is specified income, taxed at 30% (Section 344).

Rule 2: the 20% limit for general public utility

A charity whose purpose is the advancement of any other object of general public utility may carry on a commercial activity only if all three conditions in Section 346 are met:

Three points are easy to miss:

• It is a receipts test, not a profit test. A loss-making café still counts its full takings.
• Total receipts are the organisation’s receipts for the year as a whole, such as donations, grants, fees and interest, as well as the commercial receipts themselves.
• It is tested every tax year. A good year doesn’t carry over.

What the Supreme Court said. In ACIT (Exemptions) v. Ahmedabad Urban Development Authority, decided on 19 October 2022 under the 1961 Act, the Court read the old general public utility proviso strictly. It held that charging for an activity at cost, or at a nominal mark-up over cost, isn’t trade, commerce or business, but that charges substantially above cost make the activity commercial, so it is allowed only within the 20% limit. The judgment was given under the 1961 Act, but Section 346 is built the same way, so it is likely to remain the main guide until the courts rule on the new wording.

What happens if you cross the 20% line

This changed on 1 April 2026. Until the Finance Act, 2026, crossing the limit was a specified violation that could lead to cancellation of registration. It no longer is (Section 351(1)(b) as amended). Instead, Section 353(1)(d) applies to that year:

• the year’s regular income, less the organisation’s permitted expenditure, is taxable at normal rates. Permitted expenditure is revenue (not capital) spending in India on the objects, not paid from the corpus or from loans;
• any specified income and residual income is taxed as well.

The registration survives, but a charity that crosses the limit year after year should ask whether the activity has outgrown it.

Schools, hospitals and fees

Education and medical relief are named charitable purposes, so the 20% limit doesn’t apply to them. A registered school can charge fees and a registered hospital can charge patients. Three conditions still hold:

• the fees are regular income, so the 85% rule applies to them;
• it must be run for education or medical relief, not to make money for anyone, and its surplus must go back into its objects;
• any commercial sideline, such as a shop or a canteen open to the public, must be incidental, with separate books.

Social enterprises, Section 8 companies and trading arms

“Social enterprise” isn’t a legal form. An organisation that wants to earn most of its income from trading has three broad choices, each with different tax results:

• A registered trust or society that keeps its trading incidental to its objects, with separate books, and within the 20% limit if it is a general public utility charity.
• A Section 8 company. It can earn a surplus, but must apply its income to its objects and can’t pay dividends. It needs Section 332 registration for exemption like any other NGO, and the same Section 345 and 346 tests then apply to it. See how to register a Section 8 company.
• A separate trading company owned or linked to the NGO, taxed as an ordinary business. If trustees or their relatives hold 20% or more of its voting power or profits, it is a related person of the NGO, and any benefit the NGO gives it, such as cheap premises, staff or loans, is taxed at 30% as specified income.

Trust, society or Section 8 company compares the legal forms.

GST is a separate question

Income tax isn’t the only tax on earned income. Sales of goods are taxable under GST, and services are taxable unless an exemption applies, such as the one for a registered charity’s defined charitable activities. Once an NGO’s aggregate turnover passes the registration threshold (₹20 lakh for services, ₹40 lakh if it supplies only goods, lower in some states), it must register and charge GST. Sponsorship is a taxable service, not a donation. See GST for NGOs.

Before you start charging: a checklist

• Check your objects. Is the activity within them? If you change them in a way that no longer fits your registration, apply in Form 105 within 30 days.
• Know your category. If your purpose is general public utility, plan for the 20% test from the start.
• Set your prices deliberately. Following the Supreme Court’s reasoning, charging at cost or with a nominal mark-up keeps an activity out of the commercial category; prices well above cost bring it in.
• Open separate books before the first sale.
• Track the ratio of commercial receipts to total receipts every quarter, not just at year end.
• Check GST before you invoice anyone.
• Minute the board’s decision, and the reasons the activity serves the objects.

Earned income can make an NGO stronger and less dependent on grants, but the structure matters, so ask a chartered accountant to review any trading activity before it starts, and again once it grows.