Income Tax Act, 2025: A New Compliance Regime For NPOs

PREFACE – INCOME‑TAX ACT, 2025: A NEW COMPLIANCE REGIME FOR NPOS

The Income‑tax Act, 2025 redefines the compliance framework for Non‑Profit Organisations (NPOs) by tightening registration and object‑level requirements. This article highlights the key changes and their practical impact.

(I) INCOME TAX ACT 2025 – IMPACT ON NON-PROFIT ORGANISATIONS (NPOS)

• The Income Tax Act 2025 introduces a structured framework for taxation of NPOs.
• All key provisions relating to registration, income computation, application & accumulation of income, donations, and compliance are consolidated in Part B of Chapter XVII (Sections 332–355).
• Earlier, under the Income-tax Act 1961, these provisions were spread across multiple sections, making interpretation complex.
• The new Act aims to simplify structure, improve clarity, and streamline compliance for NPOs.

Comment: The new Income Tax Act 2025 largely reorganises and consolidates the existing NPO taxation framework rather than introducing fundamental changes to the core principles.

(II) STRUCTURE OF NPO PROVISIONS – INCOME TAX ACT 2025

1. Definition

• Charitable Purpose – Clause 2(23) (earlier Sec. 2(15))

2. Registration

• Application for Registration – 332
• Switching of Regimes – 333

3. Computation of Income

• Tax on Income – 334–343

(Regular income, taxable income, corpus donations, application & accumulation of income)

4. Commercial Activities

• Business undertaking as property – 344
• Restriction on commercial activities – 345–346 (including GPU entities)

5. Compliance

• Books of Account – 347
• Audit – 348
• Return of Income – 349
• Permitted Investments – 350

6. Violations

• Specified Violations – 351
• Tax on Accreted Income – 352
• Other Violations – 353

7. Other Provisions

• Approval for Donations – 354
• Interpretation Clause – 355
• Consequential Amendments – Clauses 2(49), 92, 129, 133, 206, 270, 445.

(1) CHARITABLE PURPOSE – CLAUSE 2(23) (ITA 2025)

(Earlier Sec. 2(15), ITA 1961)

• Relief of poor, Education, Yoga, Medical relief, Environment preservation, Heritage preservation, and General Public Utility (GPU).
• Restriction on commercial activities for GPU moved from Sec. 2(15) proviso to Clause 346.
• Limited commercial income allowed; excess may be taxable but registration not automatically cancelled.

Comment: Since neither the Income-tax Act 1961 nor the Income Tax Act 2025 provides a detailed definition of “charitable purpose”, judicial interpretations continue to play an important role in determining its scope.

(2) APPLICATION FOR REGISTRATION – SEC.332 of INCOME TAX ACT 2025

Summary:

• Existing NPOs registered under Sec. 12A, 12AA, 12AB or Sec. 10(23C) can continue to claim benefits if registration is valid.
• Entities under Sec. 10(23C) are required to switch to Sec. 12AB registration.
• Smaller NPOs (having income below ₹5 crore in the last two financial years) are eligible for a validity period of 10 years for registration under Section 12AB instead of the standard 5 years.
• Fresh registration required if there is adoption or modification of objects.

        Comment: Practically no major change compared with the earlier provisions.

Eligible Entities as NPO – Sec.332(1) of ITA 2025

Under the Income Tax Act 2025, the following entities may fall within the Non-Profit Organisation (NPO) framework:

• Charitable Trusts or Institutions
• Societies established for charitable purposes
• Section 8 Companies formed for charitable objects
• Universities established by law or Government
• An institution financed wholly or in part by the Government or a local authority; or
• Any person as referred to in Schedule III (Table: Sl. No. 27) to (Table: Sl. No. 29) and (Table: Sl. No. 36) and in Schedule VII (Table: Sl. No. 10) to (Table: Sl. No. 19) and (Table: Sl. No. 42); or-(I.e. usually means government bodies or statutory authorities, and transactions with such entities are treated differently from private persons)
• Persons specified in the relevant Schedule to the Act
• Persons notified by the Board

A person eligible for registration-Sec 332 (2) ITA 2025

• The objects must relate to charitable purposes in India, meaning that the activities and benefits should primarily serve the public within India.
• The property and income of the NPO must be irrevocably dedicated to charitable purposes, which implies:

• The assets cannot be distributed to trustees, founders, or members.
• The property must permanently remain for charitable use.
• Income and assets must be applied only for charitable objects and not for private benefit.

Comment: Under Section 332 of the Income‑tax Act, 2025, the charitable objects must relate to charitable purposes in India. Unlike section 11(1)(c) of the Income‑tax Act, 1961, where application of income outside India was examined later and allowed with CBDT approval, the new law shifts scrutiny to the registration stage itself. Therefore, if the Trust Deed or MOA allows application of funds outside India, the CIT(E) may legitimately question or deny registration, even if no such application actually occurs.

Exclusion of Foreign Charities

• Under the Income Tax Act 2025, the registration provisions for NPOs apply only to organisations established or operating for charitable purposes in India.

Therefore:

• Foreign charities are not eligible to obtain registration under these provisions.
• However, foreign organisations may still operate in India through other regulatory frameworks, but they cannot claim NPO registration under the Income Tax Act provisions.

3. TAX ON INCOME OF REGISTERED NPOs’ -SEC 334 of ITA 2025

Under the Income Tax Act 2025, the income of a Registered Non-Profit Organisation (NPO) is broadly classified into three categories:

• Regular Income – Sec 335
• Specified Income -Sec 337
• Residual Income- Sec 355 (J)
• Regular income refers to income that is normally eligible for tax exemption, provided the conditions of the Act are satisfied. regular income shall include Activity Income, Income from the property/investment held under the Trust, Voluntary Contribution, Income from the Business held as property and Incidental Business Income. This income remains exempt from tax (Sec 336) if it is applied/accumulated for charitable purposes according to the provisions of the Act. (Sec 341 and 342)
• Specified income refers to certain types of income which are taxable at special rates, even for registered NPOs. Examples may include: Anonymous Donation, Any Income applied directly or Indirectly for the benefits of any related person, Income applied outside India, any investment (including Source Corpus Donation) made in contravention with Sec 350 of the ITA 2025, Accumulated Income applied for other than purpose of accumulation or not utilized or paid to NPO, any income applied other than Charitable Object and any Income determined by AO in excess of Income shown in Books of accounts. These incomes are subject to specific tax provisions @ 30% -Sec 334 (1) (a).
• Residual income refers to income that does not fall under regular income or specified income categories. Residual income is generally taxed at the normal tax rate applicable to the NPO.
• The provisions of this Chapter shall apply irrespective of anything to the contrary contained in any other provision of this Act other than sections 96 to 98.

Income Not to be Included in Regular Income-Sec 338 of ITA 2025

• While calculating the regular income of a registered NPO, certain receipts or applications are excluded from the computation.
• Corpus donations (Sec 339) received with a specific direction from the donor are not included in regular income. However, this benefit is subject to the condition that the corpus funds are invested or deposited in the permitted modes specified under Section 350. Deemed corpus donations (Sec. 340) are subject to separate conditions
• Income applied outside India will not be included in regular income if the CBDT (Board) issues a general or special order permitting it.

APPLICATION OF INCOME -Sec 341 of ITA 2025

• 85% Rule: At least 85% of regular income must be applied for charitable or religious purposes in India.
• Donation to Other NPOs: Only 85% of donation given to another registered NPO is treated as application.
• Corpus / Loan Application: Amount applied from corpus or loan is not treated as application, but reinvestment of corpus or repayment of loan within 5 years is allowed as application.
• Not Allowed: Depreciation on assets already treated as application and set-off of excess application of earlier years are not permitted.
• Capital gains form part of the regular income of a registered NPO under the Income Tax Act 2025. However, under Section 341(9), where the sale proceeds of a capital asset are utilised for the acquisition of a new capital asset, such utilisation is treated as application of income. This concept is broadly similar to Section 11(1A) of the Income-tax Act 1961, which provided for reinvestment of capital gains.

Comment

Although the drafting has changed in the Income Tax Act 2025, the principle of treating reinvestment in a new capital asset as application of income broadly continues.

ACCUMULATION OF INCOME AND CONDITIONS FOR EXEMPTION- Sec. 342.

• A registered NPO may accumulate income for a specific purpose for up to 5 years
• The statement of accumulation must be filed in Form 109 before the due date for filing the return under Sec. 263(1).
• The accumulated funds must be invested in permitted modes under Sec. 350.
• Transfer of accumulated income to another NPO is not treated as application of income, except in case of dissolution.
• Change in the purpose of accumulation may be permitted by the Assessing Officer on application in Form 110.

DEEMED APPLICATION

 Shortfall of <85% of regular income may be treated as deemed application (Sec. 341(5)).

• Option to be exercised by filing Form 108 before due date of return (Sec. 263(1)).
• Amount must be applied for charitable or religious purposes in India within the permitted timelines and conditions specified under Sec. 341(6).

DEEMED ACCUMALATION -Sec 343

Under the Income Tax Act 2025, Section 343 provides for automatic accumulation (Statutory Accumulation) of income by a registered NPO.

• Up to 15% of regular income (after application of income) is treated as deemed accumulated income.
• If the amount is invested or deposited, it must be in permitted modes under Sec. 350.

4. RESTRICTION ON COMMERCIAL ACTIVITIES – SEC. 345 & 346 (ITA 2025)

• 345: NPOs (other than GPU) can do commercial activity only if it is incidental to objectives and separate books are maintained.
• 346 (GPU NPOs): Commercial activity allowed only if it is part of charitable work, within 20% of total receipts, and separate books are maintained under the Income Tax Act 2025.

Comment : The computation of income for the Tax Year 2026–27 shall be prepared in accordance with the provisions of the Income-tax Act, 2025 (ITA 2025)

5. COMPLIANCE

BOOKS OF ACCOUNTS & AUDIT

Sect 347 and 348 of the Income-tax Act, 2025 prescribe that maintenance of books of account, audit of such books, and filing of the audit report are mandatory compliance requirements for an NPO to claim tax exemption.

This requirement is broadly similar to the provisions under Section 12A(1)(a) (b) and (i) of the earlier Income-tax Act, 1961, read with Rule 17AA of the Income-tax Rules. Under the new regime, the corresponding procedural requirement is prescribed in Rule 187 of the Income-tax Rules, 2026.

Definition of “Books or Books of Account” – Section 2(19)

Section 2(19) defines “books or books of account” as including ledgers, day-books, cash books, account books or other books, whether kept:

(a) in written form; or

(b) in electronic or digital form, including records maintained on cloud-based storage or any electromagnetic data storage device such as floppy, disc, tape, portable storage device, external hard drive or memory card; or

(c) as printouts of data stored in electronic or digital form or on the storage devices mentioned above.

Comment

Under the earlier Income-tax Act, 1961, the definition of “books or books of account” under Section 2(12A) recognized written and electronic records, but cloud-based storage was not expressly mentioned. The Income-tax Act, 2025 specifically recognizes cloud-based accounting systems and modern digital storage formats, thereby aligning the statutory definition with current accounting and record-keeping practices.

RERURN OF INCOME

A key compliance requirement for NPO is filing of Income Tax return vide Sec 349 of ITA 2025 accordance with the provisions of   Sec  263(1)(a)(iii).

Under the Income-tax Act, 1961, charitable organisations could claim exemption if the return of income was filed within the time allowed under Section 139(1) or even through a belated return under Section 139(4).

Finance Bill 2026 framework, the provisions relating to filing of return have been restructured. The Act permits belated filing of return up to 31 December, subject to the prescribed condition (Sec 263 (1)(c ) (original return) or S. 263(4) (belated return).

PERMITTED MODES OF INVESTMENT

• Section 350 of the Income Tax Act 2025 provides that the funds of a registered Non-Profit Organisation (NPO) must be invested or deposited only in the modes specified in Schedule XVI.
• In addition, the CBDT may notify additional modes of investment or deposit.

This provision broadly corresponds to:

• Section 11(5) of the Income-tax Act, 1961
• Rule 17C, and
• Section 13(1)(d) relating to investment restrictions.

KEY CATEGORIES OF PERMITTED INVESTMENTS

Government-Backed Instruments

• Savings certificates issued under the Government Savings Certificates Act, 1959 and notified small savings schemes.
• Securities issued by the Central or State Government.
• Sovereign Gold Bonds issued under the notified scheme.
• Deposits into the Public Account of India.

Deposits with Banks and Financial Institutions

• Accounts with the Post Office Savings Bank.
• Deposits with scheduled banks and co-operative banks, including land mortgage and land development banks.
• Deposits with the Industrial Development Bank of India (IDBI).

Investments in Public Sector Companies (PSUs)

• Investment in shares, bonds or debentures of Public Sector Companies.

Public Financial Corporations and Housing / Infrastructure Companies

• Bonds issued by financial corporations providing long-term finance for industrial development.
• Bonds of public companies providing long-term finance for housing or urban infrastructure.
• Debt instruments issued by infrastructure finance companies registered with the RBI

Units of Regulated Funds

• Units of the Unit Trust of India (UTI).
• Units of mutual funds specified in Schedule VII.
• Units of Powergrid Infrastructure Investment Trust (InvIT).

Immovable Property

• Investment in immovable property, excluding plant or machinery, unless such machinery is integral to the use of the building.

Specialised Institutions and Entities

• Deposits with statutory authorities established for housing, planning, or development of cities, towns, or villages.
• Equity shares of a depository under the Depositories Act, 1996.
• Equity shares of incubatees held by incubators and equity shares of the National Skill Development Corporation (NSDC).
• Investments by recognised stock exchanges in companies engaged in securities market operations, subject to SEBI regulations.
• Investments by payment system operators authorised under the Payment and Settlement Systems Act, 2007, in companies engaged in retail or digital payment systems or in Open Network for Digital Commerce Ltd. (ONDC).

SPECIFIED VIOLATIONS & CANCELATION OF REGISTRATION

Sec 351 of ITA 2025 establishes framework for identifying and addressing “Specified Violation” for NPOs.Its grants PCIT /CIT to initiate inquiries, call for relevant documents etc—If necessary, cancel the registration upon determining a violation. The Clause 351 align with those set-forth in section 12AB(4) and 12AB(5) of ITA.

“Specified violation”:

a) Application of the Income for purposes other than the organization’s object.

b) Commercial activities contrary with Sec 345

c) Utilization of income for private religious purpose that not benefit the public

d) Allocation of Fund for the benefits of specific religious community, caste other than for Scheduled caste /Tribes, Backward clause, Women and Children

e) Activities are not genuine or not compliance with conditions of the registration.

f) the registered non-profit organisation has not complied with the requirements of any other law as referred to in section 332(7)(a), and the order, direction or decree holding that such non-compliance has occurred has either not been disputed or has attained finality.

g) Submission of false or incorrect information in the registration

OTHER VIOLATIONS – SEC. 353 (ITA 2025)

• Non-maintenance of books, non-audit, non-filing of return, or breach of GPU commercial limits are treated as other violations.
• Such violations lead to taxation of regular income under Sec. 334 (after allowing only specified expenditure).
• Specified and residual income are also taxable under the Income Tax Act 202

TAX ON ACCRETED INCOME

Sec 352 of ITA align with provisions stipulated under chapter XII-EB titled “Special provisions   relating to Tax on Accreted Income of certain Trusts of ITA.ITA Sec  352 consolidate all provisions under one legal frame

Tax on accreted income becomes applicable when any of the following events occur:

• Registration of the NPO is cancelled or withdrawn.
• The NPO adopts or undertakes modification of its objects which do not conform to the conditions of registration.
• The NPO fails to obtain renewal or revalidation of its registration within the prescribed time.
• The organisation converts into a form that is not eligible for registration as a non-profit organisation.
• The organisation merges with another entity, and the prescribed merger conditions are not fulfilled.
• Upon dissolution, the organisation fails to transfer its assets to another registered NPO within the prescribed time.

Comment: The provision ensures that charitable assets accumulated with tax exemption are not diverted for non-charitable purposes. Accordingly, when an NPO exits the charitable framework or violates prescribed conditions, tax at the Maximum Marginal Rate (MMR) is levied on the accreted income. This concept corresponds to Chapter XII-EB (Sections 115TD–115TF) of the Income-tax Act, 1961, now consolidated under Section 352 of the Income-tax Act, 2025

8. APPROVAL FOR DEDUCTION

The deduction provisions earlier contained in Section 80G of the Income-tax Act, 1961 have been replaced by Clause 133 of the Income Tax Act 2025.

However, the conditions relating to approval, renewal, and eligibility for deduction for donations to charitable institutions remain largely unchanged from the earlier law.

9. MEANING AND DEFINITIONS

Section 355 of the Income Tax Act 2025 provides definitions of various terms relevant to the NPO framework.

Some of these definitions were not explicitly provided in the earlier Act and have now been consolidated for clarity.

Anonymous Donation

The definition under clause (a) of S/ 355 of the Act remains substantially the same as the provisions contained in Section 115BBC of the earlier Act. The NPO shall obtain an identity document which indicates name and address of the donor. In absence of such identity document, the donation may qualify as an anonymous donation (exceeding prescribed threshold) resulting in the same being taxed as specified income.

Cancellation

The term “Cancellation” includes withdrawal of registration or approval.

Donation

“Donation” means any voluntary contribution received by a Non-Profit Organisation from any person.

Commercial Activity

“Commercial Activity” means any activity in the nature of trade, commerce, or business, or any service provided in relation to such activities for a cess, fee, or any other consideration, irrespective of the manner in which the income from such activity is applied or used.

Registration and Registered NPO

The Act also provides definitions of “Registration” and “Registered Non-Profit Organisation”.

Substantial Interest, Related Person and Relatives

Definitions relating to substantial interest, related persons, and relatives are largely similar to the provisions under the earlier law, including the clarifications proposed in the Finance Bill 2025.

10. CORRESPONDING FORMS–  RULES 2026

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Acknowledgment: I gratefully acknowledge the valuable assistance and guidance provided by CA  Ojas Parekh for his technical inputs and support in the preparation of this article on “Income‑tax Act, 2025 – Impact on Non‑Profit Organisations (NPOs)”. His clarity in explaining complex provisions and practical approach significantly contributed to the depth, accuracy, and coherence of the analysis presented.

Disclaimer: This note is a general interpretative summary based on the provisions of the Income‑tax Act, 2025 as understood currently and is for academic and informational purposes only. It does not constitute legal or tax advice. The views expressed are subject to judicial interpretation, administrative guidance, and future amendments. Readers are advised to seek independent professional advice before taking any decision.