The Finance Bill, 2026 has proposed a significant amendment to the taxation framework governing mergers of non-profit organisations (NPOs), aiming to align the new NPO regime with the erstwhile provisions applicable under section 12AC of the Income-tax Act, 1961.
Background: Existing Provision Under Section 352(4)
Under the existing provisions of section 352(4) of the Income-tax Act, tax on accreted income becomes payable by a specified person where a registered non-profit organisation merges with any other entity other than a registered NPO having the same or similar objects .
However, the current law does not explicitly address a scenario where one registered non-profit organisation merges with another registered non-profit organisation having the same or similar charitable objects , even though such a situation was specifically covered earlier under section 12AC of the Income-tax Act, 1961.
This legislative gap created ambiguity around the taxability of accreted income in genuine NPO restructuring and consolidation cases.
Introduction of New Section 354A
To address this issue, the Finance Bill, 2026 proposes the insertion of a new Section 354A in the Income-tax Act.
Under the proposed section, the provisions of section 352 relating to tax on accreted income shall not apply where:
- A registered non-profit organisation merges with another registered non-profit organisation , and
- The other registered non-profit organisation has the same or similar objects , and
- The merger fulfils such conditions as may be prescribed.
This amendment restores parity with the earlier exemption framework and provides certainty to bona fide NPO mergers undertaken for administrative efficiency or consolidation of charitable activities.
Amendment to Table Under Section 352(4)
To further align the law, serial number 8 of the Table below section 352(4) is proposed to be substituted. As amended, tax on accreted income shall be payable where the specified person has merged with:
- Any entity other than a registered non-profit organisation; or
- A registered non-profit organisation having the same or similar objects, but the merger does not fulfil the prescribed conditions; or
- A registered non-profit organisation which does not have the same or similar objects.
This clarifies that exemption from accreted income tax is conditional and object-based, ensuring that charitable funds are not diverted through mergers lacking alignment of purpose.
Effective Date
These amendments will come into force from 1st April 2026 and will apply from Tax Year 2026-27 onwards .
Key Takeaway for NPOs
Registered non-profit organisations planning mergers should:
- Carefully evaluate whether the objects of both entities are identical or substantially similar
- Ensure compliance with conditions that will be prescribed under the new Section 354A
- Reassess merger documentation and approval processes to avoid unintended tax exposure on accreted income
The proposed amendment brings much-needed clarity and aligns the new NPO tax regime with established principles applicable under the earlier charitable trust framework.
Official copy of the Clause is as follows
Amendment in the provision relating to merger of non-profit organisations (NPOs)
Existing provisions of section 352(4) [Table: Sl. No. 8.B] inter alia provides that the specified person shall be liable to pay the tax on accreted income where it has merged with any other entity other than a registered non-profit organisation having the same or similar objects. However, the said provision does not capture the situation where a registered nonprofit organisation has merged with any other registered non-profit organisation having same or similar objects as was provided under section 12AC of the Income-tax Act, 1961.
In order to provide for the provisions similar to section 12AC of the Income-tax Act, 1961 it is proposed to insert a new Section 354A in the Income-tax Act to provide that where any registered nonprofit organisation has merged with any other registered nonprofit organisation, the provisions of section 352 shall not apply if,-
(a) the other registered non-profit organisation has same or similar objects; and
(b) the said merger fulfils such conditions as may be prescribed.
Further, in order to align the existing provisions with the provisions of Income-tax Act, 1961 it is proposed to amend said serial number 8 of Table below section 352(4) so as to provide that the specified person shall be liable to pay the tax on accreted income where it has merged with, any other __
(a) entity other than a registered non-profit organisation;
(b) registered non-profit organisation having objects same or similar to it but the said merger does not fulfil such conditions, as may be prescribed; or
(c) registered non-profit organisation that does not have same or similar objects.
These amendments will take effect from the 1st day of April, 2026 and shall accordingly, apply to the tax year 2026-27 and subsequent tax years.
[Clauses 69 and 70]
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