The taxation framework governing Charitable trusts and institutions, now designated as Non-Profit Organizations (NPOs), has experienced a profound metamorphosis over the preceding years. Now, the curtains have been raised on the new Income Tax Bill, 2025 which aims to eliminate the redundant provisions of the existing income tax statute by adopting a simplified reference system and is proposed to take effect from April 1, 2026.

In this column, Mr. Saurabh Kedia and Ms. Megha Dhandhania (Chartered Accountants) deep dive into the contours of the key changes introduced in the taxation of NPOs. Inter alia highlighting that changing in the provisions relating to accumulation of income, they present a comparative analysis of implications arising on violations as per the existing provisions vis-à-vis the proposed provisions. While signing off, the authors quip, “The initiative to revamp the provisions and streamline the various registration regimes into a unified system is both promising and commendable. It is crucial to consider both the intricacies and the broader implications as we navigate the provisions of the new income tax bill.”

“Income Tax Bill, 2025 – The Dawn of a New Era for Non-Profit Organization Taxation!”

The taxation framework governing Charitable trusts and institutions, now designated as Non-Profit Organizations (‘NPOs’), has experienced a profound metamorphosis over the preceding years. This transformation has been precipitated by a succession of amendments promulgated through consecutive Budgets. Now, the momentous occasion has arrived. The curtains have been raised on the new Income Tax Bill, 2025 (‘ITB’). This Bill aims to eliminate the redundant provisions of the existing income tax statute by adopting a simplified reference system and is proposed to take effect from 01 April 2026. While the Bill aspires to revolutionize the landscape of the income tax statute, it is imperative to comprehend the revamped taxation regime introduced for NPOs. In this article, we delve into the contours of the key changes introduced in the taxation of NPOs:

(a) ‘Trusts’, ‘institutions’, ‘university’, etc. collectively referred to as NPOs: Under the existing Income Tax Act, 1961 (‘the existing Act’), terms such as ‘trusts’, ‘institutions’, ‘universities’, and similar references are used to denote charitable entities. To ensure consistency and enhance clarity, it is proposed to collectively refer to these entities as ‘non-profit organizations’ (NPOs). This modification aims to streamline the provisions concerning the tax treatment of NPOs, reducing redundancy and improving the overall readability of these provisions.

(b) Entities eligible for registration as NPOs: Under the existing provisions, Section 80G(5)(v) specifies the types of entities eligible for registration, such as public charitable trusts, registered societies, Section 8 Companies, and others. However, a similar provision is absent in the sections relating to charitable trusts, such as Sections 12A and 12AB. To bring clarity, it is proposed to explicitly define the types of entities, inter alia, public charitable trusts, registered societies, Section 8 Companies, university established by law or any other educational institution recognized by Government, an institution financed wholly or in part by the Government or a local authority, that will be eligible for registration as NPOs under the new income tax statute.

(c) Revamping the computation mechanism for NPOs: The new income tax bill proposes changes to the computation mechanism for NPOs, introducing key concepts such as 'regular income', 'taxable regular income', ‘deemed accumulated income’ and 'residual income'. While the introduction of these concepts, in the computation mechanism for NPOS, may not appear to be paradigm-shifting at first glance, a detailed analysis may be required to fully comprehend their potential implications and impact on NPOs.

(d) Concept of ‘residual income’ : Residual income means total income reduced by regular income and specified income. The income tax payable by a registered NPO on its total income for any tax year shall be the aggregate of the amounts calculated at 30% on specified income and the rates applicable on taxable regular income and residual income for such tax year.

(e) Concept of ‘deemed accumulated income’: Hitherto, 15% of the trust's income was not required to be invested in the modes specified under Section 11(5) of the Act. However, the new income tax bill proposes the introduction of the concept of 'deemed accumulated income.' According to this proposal, the regular income, after deducting the applied income and accumulated income under Section 342 [which corresponds to the current Section 11(2) of the Act], to the extent of 15%, will be considered as deemed accumulated income. This deemed accumulated income must be invested or deposited in specified modes. Failure to comply with this requirement may result in the deemed accumulated income being classified as 'specified income' and subjected to a tax rate of 30%. Further, any utilization of such deemed accumulated income would not be considered as application of income by the NPOs. The same will check the practice of the NPOs which hitherto used to utilize accumulated funds forming part of 15% as application of income.

(f) Changes in the provisions relating to accumulation of income: Under the existing Act, charitable trusts and institutions have the option to accumulate their income in two ways: either under Section 11(2), which allows for accumulation over a period of five years, or under Explanation 1(2) to Section 11(1), which permits accumulation for one year due to specific reasons, such as the non-receipt of income. However, the proposed provisions eliminate the option of accumulating income under Explanation 1(2) to Section 11(1). This provision was more flexible compared to Section 11(2), as it did not require the trust to invest the accumulated income in a specified manner or seek approval from the Assessing Officer to alter the purpose for which the income was set aside. The removal of this option limits the flexibility previously available to trusts under Explanation 1(2) to Section 11(1) of the existing Act.

(g) Implications of violations (existing -vs.- proposed): Comparative analysis of implications arising on violations as per the existing provisions vis-à-vis the proposed provisions are provided as under:

Sl. No.	Nature of violation	Existing provisions	Proposed provisions
A.	‘Specified violations’ potentially attracting cancellation of registration	Explanation to Section 12AB(4)	Section 351
1.	Income applied other than for its objects	To attract cancellation
2.	Income applied for private religious purposes, which does not enure for the benefit of the public
3.	NPO established for charitable purpose applied its income for benefit of any particular religious community or caste (other than SC/ST/OBC/women/children)
4.	Activity not genuine or not carried out as per conditions subject to which it was registered
5.	Non-compliance with the requirements of any other law
6.	Commercial activity not incidental to the attainment of the objectives of the NPO or separate books of account not maintained for such incidental activities	Under the existing provisions, both GPU Trusts (engaged in the advancement of any other object of general public utility) and non-GPU Trusts face the risk of registration cancellation if they fail to maintain separate books of accounts. However, the proposed provisions redefine 'specified violation' to exclusively cover Section 345, which pertains to the non-maintenance of separate books of accounts by non-GPU Trusts. This could be interpreted to mean that the non-maintenance of separate books by GPU Trusts would not constitute a 'specified violation' and, therefore, would not trigger the cancellation of their registration. It needs to be seen whether such specific dispensation of GPU Trusts is a mere drafting error or an intentional omission.
7.	Application for registration contains any false / incorrect information in application or incomplete application	According to the proposed amendment, vide Finance Bill 2025, an incomplete application will no longer be considered a specified violation. This amendment is included in the new Income Tax Bill as well. Nevertheless, furnishing of false or incorrect information shall still attract potential cancellation.
B.	‘Specified income’ taxed on gross basis @30%++	Section 115BBI	Section 337 r.w. 334
1.	Anonymous donation	Taxed on gross basis @30%++ under Section 115BBC	Taxed on gross basis @30%++
2.	Income applied by it outside India	Taxed on gross basis @30%++
3.	Income applied to purposes other than for which it is registered
4.	In respect of income accumulated for specified purpose [Section 11(2) of the existing Act]:   applied to purposes other than for which it is accumulated; if it ceases to be accumulated to apply for specified purpose; if not applied within specified period; if credited or paid to any other registered NPO;
5.	Any portion of income applied by it, directly or indirectly, for the benefit of any related person, computed in the manner, as prescribed.	Taxed on gross basis @30%++	Taxed on gross basis @30%++
6.	Income accumulated beyond one year as per Explanation 1(2) of Section 11(1)	Taxed on gross basis @30%++	Accumulation as per Explanation 1(2) of Section 11(1) done away with in ITB.
7.	Deemed accumulated income not invested in specified modes [please refer Point (e) above]	No provision for investing deemed accumulated income in specified modes.	Deemed accumulated income concept introduced in ITB – to be taxed on gross basis @30%++
8.	Any investment made in contravention of specified modes out of any income, corpus, deemed corpus, or any other fund.	Taxed on gross basis @30%++	Taxed on gross basis @30%++
9.	Any income determined by the AO in excess of income shown in the books of account of such business undertaking	Not covered	Taxed on gross basis @30%++
C.	Taxability on net basis* at applicable rates	Section 13(10)	Section 353
1.	GPU Trusts having commercial receipts in excess of 20%	Taxed on net basis at applicable rates
2.	Failure to furnish return of income within specified due date
3.	Failure to furnish the audit report
4.	Failure to maintain books of accounts where total income of NPO exceeds the maximum amount which is not chargeable to income-tax
++plus applicable surcharge and cess *deductions shall be allowed for expenditure (other than capital expenditure) incurred in India, for the objects of the trust, except for, expenditure from corpus or any loan, depreciation on asset claimed as application earlier and expenditure in form of donation to any person. Disallowances u/s 40(a)(ia), 40A(3)/(3A) applicable.

Some intriguing insights:

(a) Streamlining the registration provisions (including Section 80G): The registration provisions under the existing Sections 10(23C) and 12AB are proposed to be simplified and consolidated into one section. Additionally, the existing Section 80G of the Act has been divided into two sections in the proposed ITB: Section 354 (registration provisions) and Section 133 (conditions for availing deductions).

(b) Validity of approval granted towards application for modification of objects: The new ITB proposes that registration granted for the modification of objects will be valid for five years. If an NPO applies for modification of objects during the approved period, it needs to be clarified whether the approval for modification will be valid for the next five years, effectively extending the existing approval.

(c) Clarity on applicability of extended approval period of 10 years: Finance Bill 2025 proposed that the approval granted for small trusts shall be valid for a period of 10 years. The same does not seem to apply to trusts seeking first-time registration.

(d) Demarcated funds for corpus, accumulated income, etc.: NPOs to maintain demarcated investments in specified modes for corpus, deemed accumulated income, and accumulated income which may pose operational challenges in managing the funds.

(e) Merger conditions yet to be prescribed: Merger conditions under Section 12AC [proposed Section 352(5)] are yet to be notified.

(f) Concept of ‘tax year’ introduced: The concept of ‘previous year’ and ‘assessment year’ is proposed to be replaced with ‘tax year’. A ‘tax year’ refers to the twelve-month period of the financial year commencing on April 1st.

(g) Capital gain provisions done away with: Section 11(1A) of the current Income-tax Act provides that if a capital asset held under trust for charitable or religious purposes is transferred and the net consideration is used to acquire another capital asset, the capital gain from the transfer is deemed applied to charitable or religious purposes. Since the cost of acquiring an asset for the registered non-profit organization’s objectives is considered an application of income, these provisions were redundant and have been proposed to be removed.

The initiative to revamp the provisions and streamline the various registration regimes into a unified system is both promising and commendable. It is crucial to consider both the intricacies and the broader implications as we navigate the provisions of the new income tax bill.

Disclaimer: The above content as well as any views expressed herein are entirely personal.