Concise Manual for Non-Profit Organizations under Income Tax Act 2025

After 64 years, a New Income Tax Act 2025 has been put in force to transform direct tax structure. Through this major change, the Union has tried to overhaul the provisions applicable to NPOs such as Charitable & Religious organizations, which were covered under Section 11 of Income Tax Act, 1961.

In the following paras, we will try to understand the structure and compliances set out for these particular organizations. Chapter XVII Part-B of the Income Tax Act, 2025 (The Act), is a separate capsule meant for these organizations, it is titled “Special Provisions for Registered Non-Profit Organizations”. Please note we will not be discussing provisions relating to exit tax on NPOs u/s 352 as this article focused for starting up and routine running of NPOs.

Charity Defined u/s 2(23)

The plain vanilla meaning of charitable purpose includes-

1. Relief of poor

2. Education

3. Yoga

4. Medical Relief

5. Preservation of Environment

6. Preservation of Monuments/Objects/Places of artistic/historic interest.

7. Advancement of any other object of general public utility.

Eligibility & Registration u/s 332 (Erstwhile 12AB)

Basic eligibility:

1. It is constituted or incorporated in India.

2. Set-up wholly for carrying out one or more charitable purposes referred u/s 2(23) or wholly for public religious purposes.

3. The assets are held for benefit of general public under irrevocable trust.

Types of Organizations permitted:

1. Public Trusts, Registered Societies, Section 8 Companies

2. Institutions partly or wholly financed by Government

3. Investor Protection Funds set up by Stock Exchanges/Commodity Exchanges/Depositories

4. University/other educational institution and Hospital/other medical institution.

Registration procedure:

1. Once permanent registration is granted, application for renewal in Form No. 105 is to be made at least six months before expiry.

2. If there is any modification of objects by any registered NPO, application for modification of registration shall be filed in Form No. 105 within 30 days of such modification.

3. If any registered NPO wants to convert to notified institutions whose income is exempt u/s 11 of the act and specified schedules, its registration u/s 332 shall cease. [Section 333]

4. If any notified NPO wants to again register u/s 332, it shall apply again in Form No. 105 and proving that it is not eligible for or not taking any benefit u/s 11 of the act and specified schedules.

Registration u/s 354 (Erstwhile 80G)

Eligibility

1. Established in India and not for benefit of any particular community.

2. Does not incur expenditure of religious nature exceeding 5% of total income.

3. The MoA/Trust Deed does not contain provision for transfer of assets for purpose other than charity.

4. Maintains proper records of its receipt and expenditure

5. It shall file a statement in Form No. 113 in respect of donations received to DGIT(Systems) on or before 31^st May of year next to concerned tax year.

6. It shall also give certificate to the donor in Form No. 114 on or before 31^st May of year next to concerned tax year.

Registration procedure:

Regular Income

As per Section 335 it includes:

1. Income from charitable or religious activities done as per objects for which NPO was formed.

2. Income from properties and assets held by NPO for charitable or religious purpose.

3. Voluntary contributions i.e. donations received.

4. Income from permissible commercial activities (Discussed later).

Specific exclusions from regular income:

1. Expenses incurred i.e. application of income outside India where CBDT specifically permits so u/s 338.

2. Corpus Donation u/s 339 i.e. donations given with specific instruction to form part of corpus of NPO and it is kept in specified modes only as per Section 350.

3. Deemed Corpus Donations u/s 340 i.e. donation given for renovation or repair of temple, gurudwara, church, mosque or other notified place and such donation is only used for renovation or repair of above mentioned places. It is also required to keep the donation received in specified modes only as per section 350.

Application of Regular Income u/s 341 i.e. Expenditure

Permissible Applications:

1. 100% of amount spent on charitable or religious purpose for which NPO is registered. Disallowance for non-deduction of TDS and cash payments above 10,000 in a day are attracted.

2. 85% of amount donated to any other registered NPO.

3. Amount deposited back into corpus where application from corpus was made after 31/03/21 and deposit is within 5 years of such application.

4. Repayment of loans where application from loan was made after 31/03/21 and repayment is within 5 years of such application.

5. Depreciation for assets whose cost has not been claimed as application

Impermissible Applications:

1. Claim of any excess application from any previous tax years.

2. Amount paid as corpus donation to any other NPO.

3. Application from Corpus or Loans allowed only in year when amount deposited back into Corpus or Loan repaid.

Deemed Application:

1. Where any NPO is not able to apply at-least 85% of its regular income during the tax year due to the reason that such income has not been received or any other genuine reason, it can apply for considering such amount as deemed application.

2. The amount claimed as deemed application is to be spent within 2 tax year from when income is received or next year when application for other reasons.

3. The application shall be made in Form No. 108 before the due date of Return of Income.

Deemed Application form Capital Gains:

Where any capital asset held by NPO and used for charitable or religious purpose is sold, the capital gain will be deemed as application as per follows:

1. Where whole net consideration (Sale Price of sold asset – Expenses) utilized in purchase of new capital asset, whole Capital Gain will be deemed application.

2. Where only part of net consideration is utilized, Capita Gain deemed as application = Cost of New Asset – Cost of Transferred Asset (Sec. 72&73)

Accumulation from Regular Income u/s 342

1. Any registered NPO can accumulate a part of its regular income for a specific purpose by filing Form No. 109 to this effect.

2. The application has to be made before due date of return of income and maximum period for which income can be accumulated is 5 years.

3. The income so accumulated has to be kept in modes specified under section 350 and is allowed to be used only for the specified charitable or religious purpose.

4. If change in purpose of use is required, then application shall be made in Form No. 110.

Taxability of Regular Income u/s 336

1. During a Tax Year, where at least 85% of the Regular Income is applied i.e. spent on objectives or is accumulated, the taxable income for such tax year shall be NIL.

2. The balance 15% in above case shall be considered Deemed Accumulated Income u/s 343 and if it is to be deposited or invested, it shall be as per modes specified u/s 350.

3. Where above condition is not satisfied, taxable income shall be 85% of Regular Income (-) application & accumulations as per the act.

Taxability of Specified Income u/s 337

Following will be considered as Specified Income of Registered NPO and will be taxable @ 30%:

*Anonymous Donations means where identity record of person giving donation is not maintained, such as Name, Address etc.

*Related Persons means:

1. Author/Founder/Trustee/Manger of the NPO, such person’s relatives and any organization where such person hold 20% of voting power or right to 20% of profits

2. Any person/organization whose contribution to NPO exceeds 1 lakh or in total during tax year exceeds 10 lakhs

Commercial Activities for Registered NPOs (Sections 344, 345, 346 & Rule 182)

1. Followings conditions are to be fulfilled for undertaking commercial activities:

2. Commercial activity is incidental to fulfillment of charitable or religious objectives.

3. Separate books of accounts are maintained for such commercial activities.

4. Commercial activities shall be treated as separate entity and provisions of Chapter-XIV Part-D (Income under Business Head) shall be applicable.

5. Where the main objective of a NPO is ‘Advancement of any other object of general public utility’ following additional conditions are to be fulfilled:

6. The commercial activities are undertaken for fulfillment of its objectives only.

7. Total receipts from commercial activities do not exceed 20% of the total receipts of the NPO in a tax year.

 Accounts & Audit of NPO

1. When total income of NPO, i.e. Regular Income + Specified Income without any application, accumulation etc., exceeds basic exemption limit, such NPO is required to maintain books and records as prescribed in Rule 187 [https://www.incometaxindia.gov.in/w/rule-187-1].

2. NPO who is liable to maintain records as mentioned above is also required get its accounts audited by Chartered Accountant.

Permissible modes of Deposit & Investments

Section 350 mandated that any amount which is to be deposited or invested shall be so deposited or invested in modes specified in Schedule XVI to the act. [https://www.incometaxindia.gov.in/w/schedule-xvi-2]

Violation by Registered NPO

Section 351 provides an exhaustive list of Specified Violations which is as follows:

1. Income applied for private religious purpose; applied against the objectives; applied for particular community.

2. Carries out any commercial activity in contravention to prescribed provisions.

3. The activities being undertaken are not genuine or not accordance with prescribed provisions.

4. Provided false information for registration

5. Violation of any other law applicable on such NPO

These specified violations warrant an inquiry by PCIT/CIT and if they are found to be true the registration of NPO is liable to be cancelled.

Section 353 provides list of other violations, which are as follows:

1. Fails to maintain books of accounts

2. Fails to get books of account audited

3. Fails to furnish return of income

4. Contravenes provisions relating to commercial activities where object is of any other general public utility.

On occurrence of other violations, the income of NPO shall be chargeable to tax as per 334 in following manners:

1. Specified Income taxable @ 30%.

2. Regular Income taxable as per rates in force and only following deductions allowed:

• Expenditure incurred in India for objects of NPO except donation to any person and except depreciation of asset whose cost has been claimed as application;
• Not made from corpus or loans;
• And in accordance with provisions relating to TDS deduction and cash payment.

At a glance one can conclude that provisions relating to NPOs have been organized and simplified to a great extent, but will they remain so in the ever evolving economic environment and diverse practices, only time will tell.

******

Author: CA Aftab Ranjan Sehgal | arsehgalca@gmail.com