NGO Audit and ITR-7 Filing: Form 10B/10BB and the 85 Percent Rule

A registered charity keeps its tax exemption only if it meets annual compliance: an audit, the right audit report, a timely income tax return, and applying its income to its objects. This guide covers the regime under the Income-tax Act, 1961 for FY 2025-26. From tax year 2026-27, the Income-tax Act, 2025 applies, with revised forms.

The Audit Report

Charities whose income, before exemptions, exceeds the basic exemption limit must have their accounts audited. Under the 1961 Act:

• Form 10B applies to larger charities — for example, those with total income above ₹5 crore, those receiving foreign contribution, or those applying income outside India.
• Form 10BB applies to other charities.

The audit report must be filed at least one month before the return due date.

The Return

Charities file ITR-7, generally by 31 October where an audit is required. Filing late can cost the exemption for the year.

The 85 Percent Rule

At least 85% of the charity's income must be applied to its charitable objects in the year. Application includes spending on programmes and capital assets used for objects, but not corpus donations spent from corpus or transfers to other charities' corpus.

Accumulation

Where the charity can't apply 85%, it can accumulate the shortfall for up to five years for specified purposes, by passing a resolution and filing Form 10 before the return due date. Accumulated amounts must be invested in specified modes and spent within the period.

Other Points

• Cash payments above limits can be disallowed as application.
• Payments to related persons that benefit them can be treated as violations.
• Anonymous donations above limits are taxed at a special rate.
• Investments must be in specified modes.

Getting Help

Think Filing audits charities and handles audit reports, ITR-7 and accumulation filings.