Govt has brought out new Income Tax Bill 2025 to replace Income Tax Act 1961. While the overall Bill has a large number of provisions, SRRF has made a summary of impact of changes proposed in the new Bill for Non-Profit Organisations. These are summarised as below:
1. Consolidation and Simplification of Provisions
Unified Framework
a. The Bill consolidates scattered provisions related to NPOs into a dedicated chapter XVII Part B, covering clauses 332 to 355. The Chapter is further sub-divided into seven sub-parts. This will enhance clarity.
Standardized Terminology
b. “Registered Non-Profit Organisation or NPO” would be the new term encompassing entities registered under Sections 12A, 12AA, 12AB or 10(23C), provided their registration is not cancelled. This will replace existing term like Trust, Charitable, NGO, etc.
2. Streamlined Registration and Compliance
Existing Registrations
c. NPOs already registered under the current provisions need not re-register under the new bill. However new approvals under S.10(23C) will cease after 1-10-2024.
Structured Compliance
d. The bill introduces a structured approach to registration, taxation of income, permissible commercial activities, accumulation and compliance, etc.
3. Revised Income Computation mechanism
New Income Definitions
e. The bill introduces concepts such as ‘regular income’, ‘taxable regular income’, ‘deemed accumulated income’, and ‘residual income’ for NPOs. These definitions aim to provide a clearer framework for income computation.
f. Regular Income: consists of voluntary contributions consisting of general donations, rent from trust property, interest on trust funds, dividends from investments and income from incidental business activities. 85% application rule is generally calculated on regular income.
g. Taxable regular income: Regular Income that is not applied to charitable purposes and is not validly accumulated. Any regular income which is neither applied, nor validly accumulated, becomes taxable at 30%.
h. Residual Income: Total income of an NPO becomes fully taxable when the NPO violates certain core provisions of the Income Tax Act. These get triggered when an NPO
- Misapplies income (e.g. uses for non-charitable purposes),
- Engages in prohibited commercial activities (activities not incidental to main objects)
- Fails to maintain proper books of accounts
- Violates the terms of registration or approval
- Does not file income tax returns or audit report (Form 10B/10BB) within prescribed time.
- Fails to re-invest proceeds from asset transfers as required.
4. Major Changes in case of treatment of capital gains
Capital Gains Treatment: Earlier S.11(1A) allowed NPOs to claim exemption on capital gains if the net consideration from the sale of a capital asset was reinvested in acquiring another capital asset, as this reinvestment of income was treated as application for charitable purposes. However under the proposed Bill this option is no longer available and such gains are to be considered under the standard 85% application rule of regular income, as net consideration is considered part of regular income of an NPO. Thus there is no deduction available to NPOs for capital gains, otherwise covered under the Income Tax for other type of assessees.
5. Restrictions on Commercial Activities
The Income Tax Bill explicitly prohibits NPOs from engaging in any commercial activity, except for activities that are incidental to their objectives.
6. Section 80G revisions
Deductions for donations under S.80G are now covered under Clause S.133, under two clauses of 100% and 50%. Most NPOs would fall under the 50% category.
7. Introduction of the ‘Tax Year’ Concept
The bill updates the terms ‘assessment year’ and ‘previous year’ with ‘tax year’, aligning with international tax terminology.
8. Effective date
Govt has promised to bring the bill to come into effect on 1-4-2026.
—
Socio Research & Reform Foundation (NGO)
512 A, Deepshikha, 8 Rajendra Place,
New Delhi – 110008