Budget 2025: Simplified Tax Provisions for charitable/business trusts, start-ups & capital gains

Finance Bill 2025 introduces amendments aimed at simplifying and rationalizing tax provisions under the Income Tax Act, 1961, with a focus on charitable trusts, business trusts, start-ups, and capital gains taxation. For charitable trusts, registration validity is extended to 10 years for smaller trusts, simplifying compliance and reducing administrative burdens. The threshold for substantial contributions has been increased, easing reporting requirements. Business trusts like REITs and InVITs will now include Section 112A provisions for capital gains taxation, aligning their treatment with other securities. Significant Economic Presence provisions are amended to exclude export-related transactions, ensuring non-residents engaged in legitimate export activities are not taxed unfairly. Unit-linked insurance policies (ULIPs) exceeding exemption thresholds will be classified as capital assets, ensuring consistent taxation as capital gains. Securities held by investment funds are also explicitly categorized as capital assets to avoid disputes. Start-ups gain an extension of tax benefits under Section 80-IAC, with eligibility now extended to those incorporated before April 1, 2030. This supports entrepreneurship by providing a 100% tax deduction for profits over three years. Finally, long-term capital gains for non-residents will face a uniform 12.5% tax rate, aligning with resident taxpayers and fostering cross-border investment.

THE FINANCE BILL, 2025 – Simplification and Rationalisation of Tax Provisions under Income Tax Act, 1961

1. Simplification of Tax Provisions for Charitable Trusts/Institutions

Key Change: The income of any trust or institution registered under Section 12AB will remain exempt from taxation, subject to fulfilling the conditions laid out in the Act. Registration under Section 12A outlines the application procedure for claiming exemptions under Sections 11 and 12, while Section 12AB deals with the registration and cancellation processes for trusts seeking exemption.

Reasoning:

• The current process of applying for registration and claiming exemptions can be cumbersome and complex, particularly for smaller trusts. By simplifying the registration and approval processes, the government aims to reduce administrative hurdles and make it easier for charitable organizations to comply with tax laws. This is particularly important for trusts that focus on social welfare, education, and healthcare, as it ensures they can channel their resources more effectively toward their core activities rather than being bogged down by complex paperwork.
• By streamlining the process, the government also hopes to increase transparency and ensure that the conditions for exemption are being met consistently across all charitable organizations.

2. Rationalisation of ‘Specified Violation’ for Cancellation of Registration

Key Change: Under Section 12AB(4), a trust’s registration could be canceled if its application was found to be incomplete or false. The proposed amendment will exclude incomplete applications from being classified as “specified violations” and thereby prevent the automatic cancellation of registration.

Reasoning:

• The current provision has led to unwarranted cancellations of trust registrations due to minor administrative errors or incomplete documentation in their applications. Such actions could lead to the trust becoming liable for tax on accreted income, which can be a significant burden for charitable organizations.
• The amendment is designed to prevent undue penalization for trusts that may have made minor errors during the registration process. It will ensure that the focus is placed on substantive violations rather than procedural mistakes, thus reducing the compliance burden for smaller trusts and encouraging more charitable organizations to apply for registration without the fear of administrative penalties.

3. Extended Period of Registration for Smaller Trusts/Institutions

Key Change: The proposed amendment will extend the period of registration from 5 years to 10 years for smaller trusts and institutions that have a total income of less than Rs. 5 crores in the preceding two financial years.

Reasoning:

• Charitable trusts and institutions, especially smaller ones, often face difficulties in meeting annual compliance requirements. The process of applying for registration renewal every five years adds to the operational burden.
• By increasing the registration validity period to 10 years for qualifying institutions, the government intends to ease the administrative workload on smaller trusts, allowing them to focus on their mission rather than compliance. This extended period will benefit those trusts that have demonstrated consistent operations and a stable financial position.
• The change will also ensure that trustees and managers spend less time on routine regulatory processes and more time on programmatic activities, ultimately benefiting the community and causes the trust serves.

4. Rationalisation of Persons Specified Under Section 13 for Trusts/Institutions

Key Change: The amendment proposes to increase the threshold for substantial contributions to a trust from Rs. 50,000 to Rs. 1 lakh in a year or Rs. 10 lakh cumulatively, after which a person and their relatives may be restricted from benefiting from the trust’s income. Additionally, relatives and concerns with substantial interest in such persons will no longer be included.

Reasoning:

• The current provisions under Section 13 create significant administrative challenges for trusts. Many small trusts find it difficult to comply with the detailed reporting requirements for substantial contributors and their relatives.
• The change aims to simplify compliance, as only those making substantial contributions (i.e., Rs. 1 lakh annually or Rs. 10 lakh cumulatively) would be subject to restrictions. By excluding the relatives and concerns of contributors, the amendment reduces the complexity of the reporting process for trusts and institutions.
• This amendment is designed to focus on larger contributors whose influence over the trust may affect its independence, rather than trivial or minor contributions that do not substantially affect the trust’s functioning.

5. Rationalisation in Taxation of Business Trusts

Key Change: Business trusts such as REITs and InVITs are currently taxed on interest, dividends, and rental income received from special purpose vehicles (SPVs) on a pass-through basis. The proposed amendment will also include Section 112A provisions for long-term capital gains from the transfer of capital assets within business trusts.

Reasoning:

• Business trusts, particularly REITs and InVITs, have a unique structure where income is passed on to unit holders, but the taxation of capital gains has not been aligned with the broader tax regime.
• By extending the provisions of Section 112A (taxation of long-term capital gains on securities) to include business trusts, the amendment aims to standardize the tax treatment across various types of investments, providing more predictability and transparency for investors in these trusts.
• This will also encourage greater investment in infrastructure and real estate through these specialized investment vehicles, which are critical to financing public infrastructure projects.

6. Harmonisation of Significant Economic Presence with Business Connection

Key Change: The amendment to Explanation 2A of Section 9 proposes that transactions by non-residents purchasing goods in India for export will not be deemed as significant economic presence in India, thereby preventing unnecessary taxation on export-related activities.

Reasoning:

• The current interpretation of significant economic presence (SEP) could unintentionally capture non-residents involved in routine export transactions, resulting in undue tax implications for foreign companies conducting legitimate business activities in India.
• By excluding such export-related activities from the definition of business connection, the amendment ensures that non-residents engaged solely in export operations will not be subject to Indian tax on income derived from those operations.
• This change is aligned with the goal of encouraging international trade and investment, particularly in the export sector, without subjecting companies to unnecessary tax burdens for activities that do not impact the Indian economy directly.

7. Clarity in Taxation of Income on Redemption of ULIPs

Key Change: ULIPs (unit-linked insurance policies) that do not meet the exemption criteria under Clause 10D of Section 10 will now be treated as capital assets, and profits from their redemption will be taxed as capital gains.

Reasoning:

• Prior to this amendment, there was confusion regarding the tax treatment of ULIPs that do not qualify for exemption under Section 10D. ULIPs that exceed the Rs. 2.5 lakh premium threshold were often subjected to inconsistent tax treatment, especially regarding capital gains.
• By explicitly treating such ULIPs as capital assets, this change standardizes the tax treatment for investment-linked insurance products, making it clear that they are subject to capital gains tax if they do not meet the exemption requirements.
• This will improve tax compliance by eliminating ambiguity and ensuring that investors are aware of the tax implications of their ULIP investments, especially in the case of high-value policies.

8. Amendment of the Definition of ‘Capital Asset’

Key Change: Securities held by investment funds will now be explicitly treated as capital assets under Section 115UB, ensuring that any income derived from the transfer of such securities will be taxed as capital gains.

Reasoning:

• The definition of capital assets has created confusion regarding the taxation of securities held by investment funds. These funds often face challenges in classifying income as either business income or capital gains, particularly when they hold securities.
• By amending the definition to explicitly treat these securities as capital assets, the government aims to provide certainty in the tax treatment of these funds. This will allow investment funds to avoid the ambiguity around whether their income should be categorized as capital gains or business income.
• This amendment is particularly relevant for foreign institutional investors (FIIs) and other investment entities, as it will streamline the tax compliance process and reduce disputes related to the classification of income.

9. Extension of Timeline for Tax Benefits to Start-ups

Key Change: The proposed amendment will extend the period for tax benefits under Section 80-IAC for start-ups. Start-ups incorporated before 1st April 2030 will now be eligible for a 100% tax deduction on profits for three consecutive assessment years, within a ten-year period from incorporation.

Reasoning:

• The current provisions provide tax relief for start-ups only up to 2025, but the amendment extends the benefit for another five years, encouraging the establishment and growth of more start-ups.
• By offering this extended tax holiday, the government seeks to foster entrepreneurship and innovation, particularly in sectors where capital-intensive start-ups are crucial for economic development.
• This change ensures that the start-up ecosystem remains vibrant and that new businesses have the financial support they need during their early years, where they often face high operating costs and limited access to capital.

10. Rationalisation of Taxation of Capital Gains on Transfer by Non-Residents

Key Change: The amendment to Section 115AD proposes to apply a uniform tax rate of 12.5% on long-term capital gains for both resident and non-resident taxpayers.

Reasoning:

• The current tax treatment of long-term capital gains for non-residents is inconsistent with the rates applicable to residents, leading to disparities in taxation and creating complexity in cross-border investments.
• By aligning the tax rates for residents and non-residents, the government aims to ensure a level playing field and enhance fairness in the tax system. This move will encourage more foreign investment by providing clarity and consistency in the tax treatment of capital gains.
• This is part of broader efforts to simplify the taxation of non-residents, aligning it more closely with the international standards for cross-border taxation.