Income Tax Act, 2025 – Trusts & Non-Profit Organisations (NPOs)

The Income Tax Act, 2025, effective from April 1, 2026, introduces a simplified and consolidated framework for taxation of trusts and Non-Profit Organisations (NPOs). The objective is not to increase taxes, but to improve clarity, streamline compliance, and consolidate scattered provisions into a single structured framework.

1. Key Structural Changes

• All NPO-related provisions are consolidated under Chapter XVII-B (Sections 332–355).
• A unified term — Registered Non-Profit Organisation (Registered NPO) — now covers trusts, societies, Section 8 companies, educational institutions, hospitals, and religious organisations.
• The Act significantly reduces complexity by minimising scattered sections, forms, and statutory language.

The revised framework focuses on simplification while largely retaining the exemption philosophy that existed under the Income Tax Act, 1961.

2. Registration Framework

• Registration under Section 332 is mandatory for exemption benefits.
• Existing registrations under Sections 12A, 12AA, 12AB, and 10(23C) automatically continue.
• Small NPOs with income below ₹5 crore may obtain registration validity for up to 10 years.

Authorities examine:

• Charitable or religious objects
• Genuineness of activities
• Compliance with other applicable laws

Once registration is granted, its validity generally cannot be questioned during assessment proceedings.

3. Core Taxation Principles

• The core 85% application rule continues.
• If 85% of regular income is applied or accumulated for charitable purposes, exemption remains available.

Regular income includes:

• Donations
• Investment income
• Charitable receipts
• Permitted incidental business income

Specified income such as misuse of funds, prohibited investments, or excess anonymous donations is taxable at a flat 30% rate.

4. Corpus Donations & Accumulation

• Corpus donations remain exempt if specifically directed by the donor.
• Corpus funds must be separately maintained and invested only in prescribed modes.
• Accumulation of income is permitted for a maximum period of 5 years subject to disclosure and investment conditions.

The Act continues to encourage long-term charitable planning while tightening monitoring over utilisation of funds.

5. Commercial Activities

Charitable and religious institutions may undertake commercial activities only if:

• The activities are incidental to the main charitable objects
• Separate books of account are maintained

Organisations falling under the “general public utility” category can undertake commercial activities only up to 20% of total receipts.

The objective is to prevent misuse of charitable status for commercial gain.

6. Compliance Requirements

Registered NPOs are required to:

• Maintain proper books of account
• Obtain statutory audit where applicable
• File income tax returns within prescribed timelines
• Invest funds only in permitted modes

A notable relaxation is that belated return filing is now permitted without automatic denial of exemption benefits, subject to prescribed conditions.

7. Violations & Consequences

Serious violations may lead to:

• Cancellation of registration
• 30% tax on accreted income

Examples include:

• Diversion of charitable funds
• Non-genuine activities
• Related-party misuse
• False information during registration

Minor non-compliances generally result in taxation consequences instead of outright cancellation.

8. Overall Impact

The Income Tax Act, 2025 modernises India’s nonprofit taxation framework by improving readability, certainty, and administrative efficiency. While the practical tax treatment remains largely similar, trusts and NPOs benefit from a more organised and transparent compliance regime.

Written by Raghavendran T