Comprehensive Guide for NPOs Under the New Income Tax Code 2025
- Kanagaraj Antonysamy
- Feb 14
- 4 min read
Note: The following is a condensed version of a full-length article, and contains only a summary of the key points. For the main article, please click here.
Disclaimer: This article is for informative purposes only and is based on the current draft of the Income Tax Bill. The bill is expected to come into effect on 1 April 2026, following further discussions, amendments and clarifications. Readers are encouraged to stay updated with official announcements and consult a professional for specific advice.
Introduction
The New Income Tax Code 2025 introduces significant reforms to the taxation and regulatory framework for Non-Profit Organizations (NPOs) in India. These reforms aim to increase transparency, accountability, and efficiency within the non-profit sector by modifying provisions related to registration, income categorization, investment rules, and compliance requirements. This guide provides a comprehensive overview of the new provisions, compares them with the current Income Tax Act, 1961, and analyses their potential impact.
1. Registration and Compliance
Section 332: Application for Registration
New Code: Mandates a detailed registration process with eligibility criteria, documentation, and compliance verification by the Commissioner.
Current Law (Section 12AA of IT Act, 1961): Registration focused primarily on ensuring the genuineness of the charity.
Key Changes: Stricter scrutiny, mandatory renewal every 3-5 years, and detailed reporting requirements.
Section 333: Switching of Regimes
New Code: Allows NPOs to switch between exemption regimes with specified conditions.
Current Law: No specific provisions for switching.
Key Changes: Greater flexibility with clear guidelines.
2. Income Classification and Taxability
Section 334: Tax on NPO Income
New Code: Income taxed at 30% for specified income and applicable rates for regular and residual income.
Current Law (Sections 11-13): Exemptions based on income utilization with fewer classifications.
Key Changes: Enhanced clarity and uniformity.
Section 335: Regular Income
New Code: Income from charitable activities, investments, voluntary contributions, and permitted commercial activities.
Current Law (Section 11(1)): No explicit definition of regular income.
Key Changes: Clear categorization improves compliance.
Section 336: Taxable Regular Income
New Code: Regular income becomes taxable if less than 85% is applied to charitable purposes.
Current Law (Section 11(1)): Similar requirement with more flexible interpretation.
Key Changes: Stricter application rules.
Section 337: Specified Income
New Code: Lists specific income types, including anonymous donations above ₹1 lakh and income used for non-charitable purposes.
Current Law (Section 115BBC, Section 13(1)(c)): Similar but with less specificity.
Key Changes: Detailed classification with defined tax years.
3. Investment Regulations
Section 350: Permitted Modes of Investment
New Code: Restricts investments to low-risk avenues like government securities, savings certificates, and specified bonds.
Current Law (Section 11(5)): Similar list with less stringent documentation.
Key Changes: Enhanced reporting and compliance mechanisms.
Section 339-340: Corpus Donations
New Code: Corpus donations are exempt if explicitly documented; misuse leads to tax liability.
Current Law (Section 11(1)(d)): Similar provisions without stringent documentation requirements.
Key Changes: Stronger compliance measures.
4. Commercial Activities Restrictions
Sections 344-346: Commercial Activities
New Code: Commercial activities allowed only if incidental to charitable objectives and do not exceed 20% of total receipts.
Current Law (Section 2(15), Section 11(4A)): Similar concept but no explicit limit.
Key Changes: Clearer thresholds and monitoring mechanisms.
5. Compliance and Penalties
Section 351: Specified Violations
New Code: Misuse of funds, unauthorized commercial activities, or providing false information results in deregistration and tax penalties.
Current Law: Similar penalties but less rigorous enforcement.
Section 352: Tax on Accreted Income
New Code: Levies 30% tax on accreted income when an NPO's registration is cancelled or assets are transferred to a non-NPO.
Current Law (Section 115TD): Similar provision with less clarity on calculation methods.
Section 353: Anonymous Donations
New Code: 30% tax on anonymous donations exceeding ₹1 lakh or 5% of total donations.
Current Law (Section 115BBC): Similar provision.
6. Approval for Deductions and Interpretation
Section 354: Approval for Deduction
New Code: Provides guidelines for obtaining approval for deductions under Section 133(1)(b)(ii).
Current Law (Section 80G): Similar provisions with more relaxed conditions.
Section 355: Interpretation
New Code: Defines terms and clarifies provisions for consistent application.
Impact Analysis
Enhanced Transparency:
Detailed documentation requirements and categorization of income ensure greater transparency.
Increased Compliance:
Stricter rules on registration, investments, and income utilization promote better compliance.
Administrative Burden:
Periodic renewal and detailed reporting might increase administrative workload.
Impact on Commercial Activities:
Restricting commercial receipts to 20% may affect NPOs reliant on such income streams.
Tax Implications:
Anonymous donations, income misuse, and improper investments are more likely to attract penalties under the new regime.
Conclusion
The New Income Tax Code 2025 introduces a more structured, transparent, and accountable framework for NPOs. While the new provisions impose stricter compliance requirements, they also provide clarity and consistency, facilitating better governance and operational integrity in the non-profit sector.
Disclaimer: This article is for informative purposes only and is based on the current draft of the Income Tax Bill. The bill is expected to come into effect on 1 April 2026, following further discussions, amendments and clarifications. Readers are encouraged to stay updated with official announcements and consult a professional for specific advice.
About the author
K Kanagaraj Antonysamy is a Chartered Accountant with over 40 years of experience, involved in church activities at various levels. He possesses a broad expertise that spans the NPO sector, International Financial Reporting Standards, and Artificial Intelligence. Additionally, he is proficient in reading and editing a few software languages. Kanagaraj delivers lectures and speaks at seminars on various accounting topics both in India and internationally. God has blessed him with a happy family consisting of his wife, son, daughter-in-law, and granddaughter.
