Library / Income-tax Act, 2025: The Professional's Master Guide

23. Non-Profit Organisations (Sections 332 to 355)

Charitable trusts, societies and section 8 companies are called non-profit organisations (NPOs) in the 2025 Act. The provisions in sections 332 to 355 consolidate the old sections 11, 12, 12A, 12AB, 13, 115BBC, 115BBI and 115TD and the related parts of section 10(23C) into one chapter. The core scheme is retained, with simpler language and a few structural changes.

23.1 Registration

Stage	Validity	Points
Provisional registration	Up to 3 years	For new NPOs that have not started activities; must apply for regular registration before expiry or within 6 months of starting activities
Regular registration	Generally 5 years; longer validity for small NPOs as provided by recent amendments	The Commissioner examines genuineness of activities and compliance with other laws
Renewal	At least 6 months before expiry	Missing renewal can trigger tax on accreted income
Approval for donor deduction (old 80G)	Same cycle	Allows donors to claim section 133

23.2 How income is taxed

Income of a registered NPO is exempt to the extent it is applied for its objects in India. The scheme requires at least 85% of income to be applied during the year; the remaining 15% can be set apart without conditions.
Where less than 85% is applied, the shortfall can be accumulated for up to 5 years for specified purposes by filing the prescribed form before the return due date. Unused accumulation is taxed in the year the period expires.
Corpus donations with a specific direction are not income, but must be invested in specified modes. Application out of corpus is not treated as application; reinvesting it back into corpus later is.
Anonymous donations above the higher of Rs. 1 lakh and 5% of total donations are taxed at 30% (religious trusts have a relaxation).
Income not applied or accumulated, or applied in violation of the conditions, is taxed at 30% without exemption limit.
Business income is exempt only if the business is incidental to the objects and separate books are kept. For NPOs whose object is "advancement of any other object of general public utility", receipts from trade, commerce or business must not exceed 20% of total receipts.
Payments to specified persons (founders, trustees, substantial contributors and their relatives) that are excessive, or use of NPO assets for their benefit, can lead to loss of exemption for that income and cancellation of registration.
Exit tax: if registration is cancelled, the NPO converts into a non-charitable entity, merges with a non-NPO, or fails to apply for renewal, tax at the maximum marginal rate is levied on its accreted income (FMV of assets less liabilities).

Judicial view: Charitable purpose

ACIT (Exemptions) v. Ahmedabad Urban Development Authority (Supreme Court, 2022): an entity whose object is "advancement of any other object of general public utility" loses the exemption if its receipts from trade, commerce or business exceed the prescribed limit. Statutory bodies that charge fees on a cost-recovery basis for public functions are not necessarily carrying on business, but charges well above cost indicate a business character.

New Noble Educational Society v. CCIT (Supreme Court, 2022): an educational institution must exist "solely" for education and not for profit; education means formal scholastic learning, and ancillary activities must be incidental to it.

Illustration 95: Application of income

Seva Trust receives donations of Rs. 60 lakh and interest of Rs. 20 lakh in Tax Year 2026-27, total Rs. 80 lakh. It spends Rs. 55 lakh on its objects and Rs. 5 lakh on capital assets for its objects (application). Total application = Rs. 60 lakh.

Required application = 85% of Rs. 80 lakh = Rs. 68 lakh. Shortfall = Rs. 8 lakh. If the trust files the accumulation form for Rs. 8 lakh for a specific purpose (say, a school building), it is not taxed now. Otherwise Rs. 8 lakh is taxable at 30%.

23.3 Compliance for NPOs

Books of account and audit where total income before exemption exceeds the basic exemption limit; audit report in the prescribed form one month before the return due date.
Return in ITR-7 by 31 October.
Statement of donations received, and donation certificates to donors in Form 114 (old 10BE), so that donors can claim deductions.
Foreign contributions require separate FCRA registration and accounts; the tax treatment follows the same scheme.

Key point

NPOs are among the most compliance heavy taxpayers. A missed renewal date or a late accumulation form can convert fully exempt income into income taxed at 30%, or trigger exit tax. Maintain a registration and filing calendar for every NPO client.

Chapter summary

• Registration, 85% application, accumulation within 5 years, and corpus rules drive the exemption.

• Anonymous donations above the limit and unapplied income are taxed at 30%.

• Loss of registration can trigger tax on accreted income.