The Income Tax Department has released a detailed explanatory document outlining the taxation framework applicable to Registered Non-Profit Organisations (NPOs) under the Income-tax Act, 2025. The new regime introduces a comprehensive structure covering registration, taxation, compliance requirements, commercial activities, donor approvals, and consequences of violations.
Under the new law, the special provisions relating to Registered NPOs are contained in Part B of Chapter XVII of the Income-tax Act, 2025. The framework applies to organisations engaged in charitable or religious activities and provides a structured mechanism for registration, taxation of income, compliance monitoring, and regulatory oversight.
Registration Framework for NPOs
The law permits public trusts, registered societies, Section 8 companies, educational institutions, government-funded institutions and certain other notified entities to seek registration as Registered NPOs. To qualify, the organisation must be established in India for charitable or public religious purposes and satisfy the prescribed eligibility conditions.
The registration system provides for provisional registration, regular registration, renewal, reactivation and registration following modification of objects. While most registrations remain valid for five years, certain small NPOs with income not exceeding ₹5 crore in each of the preceding two tax years may be eligible for a ten-year validity period.
Classification of Income
A significant feature of the new regime is the classification of income into three categories:
- Regular Income
- Specified Income
- Residual Income
Regular income generally includes income from charitable or religious activities, investments, voluntary contributions and permissible commercial activities. Specified income includes income arising from violations of prescribed conditions and is taxed at 30%. Residual income is taxed according to the normal provisions of the Act.
85% Application Requirement Continues
The framework retains the principle that a Registered NPO must apply at least 85% of its regular income towards charitable or religious purposes or validly accumulate such income for future application. Where this threshold is met, taxable regular income may effectively become nil.
The law also prescribes detailed rules for deemed application, accumulation of income, corpus donations and reinvestment of corpus funds.
Rules for Commercial Activities
The Income-tax Act, 2025 places restrictions on commercial activities carried out by Registered NPOs. For most charitable organisations, commercial activities are allowed only if they are incidental to the attainment of the organisation’s objectives and separate books of account are maintained.
For organisations engaged in the advancement of general public utility (GPU), commercial activities are permitted only if receipts from such activities do not exceed 20% of total receipts and other prescribed conditions are satisfied.
Compliance Requirements
Registered NPOs are required to maintain books of account, undergo audit where applicable, file income-tax returns and invest funds only in permitted modes specified under the law. Failure to comply may result in adverse tax consequences and even cancellation of registration.
The legislation also introduces provisions relating to taxation of accreted income in cases involving cancellation of registration, impermissible modification of objects, conversion, merger or dissolution.
Donor Approval and Tax Benefits
The Act separately provides for approval of eligible NPOs so that donors can claim deductions for donations made to such organisations. Registration as a Registered NPO does not automatically grant donor deduction benefits, and a separate approval process is required.
Key Takeaway
The Income-tax Act, 2025 establishes a dedicated and structured tax regime for Registered NPOs. The framework aims to improve transparency, strengthen compliance standards, regulate commercial activities, and ensure that tax benefits are available only to organisations genuinely engaged in charitable and religious purposes. With detailed provisions governing registration, taxation and compliance, NPOs will need to carefully review their operational and reporting practices to remain compliant under the new regime.
CAclubindia
