Income Tax Bill 2025: What Nonprofit Organizations Need to Know

The new Income Tax Bill 2025 introduces major reforms to streamline the taxation and compliance framework for nonprofit organizations (NPOs) in India. One of the major challenges faced by NPOs under the existing law has been the complexity and scattered nature of the tax provisions applicable to them. The bill recognizes this issue and seeks to simplify and consolidate these provisions into a more structured and accessible framework.

Unified Definition for Nonprofit Organizations

Currently, the Income Tax Act does not use a single term to define nonprofit entities. Instead, various sections use terms such as "trust," "institution," "educational institution," and "hospital." 

This has often led to confusion among taxpayers. The Income Tax Bill 2025 introduces the term "Registered Nonprofit Organization" (Registered NPO) as a unified definition for all such entities. This change ensures clarity and consistency in tax provisions applicable to nonprofits.

Consolidation of Provisions into a Single Chapter

A major issue in the existing tax law is that provisions related to NPOs are scattered across multiple chapters, including those dealing with charitable activities, exemptions, deductions, and the taxability of certain incomes. This has made compliance difficult, especially for small nonprofit entities that lack access to professional tax consultants.

To resolve this issue, the new bill consolidates all NPO-related tax provisions into a single chapter, Chapter 17B. This chapter is further divided into seven structured subparts, covering:

1. Registration – Application timelines, conditions for approval, and validity of registration.

2. Income Computation – Rules regarding taxability and accumulation of income.

3. Commercial Activities – Limitations on NPOs engaging in profit-generating activities.

4. Compliance Requirements – Filing of tax returns, audit requirements, and disclosures.

5. Penalties and Violations – Consequences for non-compliance.

6. Deductions under Section 80G – Regulations governing tax deductions on donations to NPOs.

7. Interpretation – Definitions and explanations of key terms used in the chapter.

How to Audit Public Charitable Trusts under the Income Tax Act, Click Here

By bringing all these provisions together, the bill makes it easier for nonprofit organizations to understand and comply with tax regulations.

Challenges in the Existing Tax Law and the Need for Reform

Through regular interactions with taxpayers and outreach programs, tax authorities have identified several pain points that nonprofits face in complying with tax regulations. Many small NPOs, such as local temples, schools, and charitable trusts, struggle with complex tax laws due to limited financial resources and a lack of expert guidance. 

Over time, the introduction of multiple amendments, explanations, and cross-references has further complicated the understanding of tax laws for nonprofits.

For example, Section 11 of the existing law has 13 explanations and 16 provisos, making it difficult for taxpayers to interpret and apply the rules correctly. The new bill simplifies these provisions, making compliance easier for small and large nonprofit entities alike.

Simplified Registration Process

A common concern among nonprofit organizations is whether they will need to re-register under the new tax regime. The bill ensures that existing registered NPOs will not need to apply for fresh registration if their current registration remains valid. Once their validity period expires, they will be required to apply for renewal as per the new provisions.

Clarity on Eligibility and Tax Exemptions

Another key provision in the Income Tax Bill 2025 is Section 332, which lays out the conditions for eligibility to claim tax benefits. The bill consolidates multiple exemption provisions and ensures that all eligible entities whether trusts, societies, or other institutions—are clearly defined.

The bill introduces a new provision allowing the Central Board of Direct Taxes (CBDT) to notify additional categories of entities that may qualify as registered NPOs in the future.

Improved Readability Through Tables and Structured Provisions

One of the most practical improvements in the new bill is the use of tables and structured provisions to improve readability. For example, Section 332, which deals with registration, now presents information in a tabular format. The table outlines:

● When an entity needs to apply for registration.

● The time frame within which the application must be processed.

● The validity period of the registration.

Sl. No.	Case	Time Limit for Furnishing Application	Time Limit for Passing Order	Validity of Registration
1	Where the activities of the applicant have not commenced and it has not been registered under any specified provision at any time before making the application.	At any time during the tax year beginning from which registration is sought.	Three months from the end of the month in which the application is made.	Three tax years commencing from the tax year in which such application is made.
2	Where the activities of the applicant have commenced and it has not been registered under any specified provision at any time before making the application.	At any time during the tax year, beginning from which registration is sought.	Six months from the end of the quarter in which the application is made.	Five tax years commencing from the tax year in which such application is made.
3	Where the applicant has been granted provisional registration and activities have commenced.	Within six months of the commencement of activities.	Six months from the end of the quarter in which the application is made.	Five tax years commencing from the tax year in which such application is made.
4	Where the provisional registration of the applicant is due to expire and activities have not commenced.	At least six months prior to the expiry of the provisional registration.	Six months from the end of the quarter in which the application is made.	Five tax years following the tax year in which such application is made.
5	Where the registration of the applicant is due to expire, other than cases mentioned at serial number 4.	At least six months prior to the expiry of the registration.	Six months from the end of the quarter in which the application is made.	Five tax years following the tax year in which such application is made.
6	Where the registration of the applicant has become inoperative due to switching over of regime under section 333.	At any time during the tax year beginning from which the registration is sought to be made operative.	Six months from the end of the quarter in which the application is made.	Five tax years commencing from the tax year in which such application is made.
7	Where the applicant, being a registered nonprofit organization, has adopted or undertaken modification of its objects.	Within thirty days of the date of such adoption or modification.	Six months from the end of the quarter in which the application is made.	Five tax years commencing from the commencement of the tax year in which such application is made.

This change eliminates the need to refer to multiple sections to determine eligibility and simplifies compliance for nonprofit organizations.

Want a deeper insight into the Income Tax Bill, 2025? Click here

Changes in Taxability and Compliance Requirements

Under the current tax law, provisions related to the taxability of NPOs' income are spread across multiple sections, such as:

● Section 13(10) - Taxability of income if returns are filed late.

● Section 115BBC - Taxability of anonymous donations.

● Section 115BBI - Taxability of certain specified income.

How to Audit Public Charitable Trusts under the Income Tax Act, Click Here

The Income Tax Bill 2025 consolidates these provisions under a single framework. The new approach differentiates between:

● Regular income - Broadly, all receipts of a registered NPO.

● Taxable regular income - Any portion of the income that is not applied or accumulated as per tax rules.

If an NPO applies 85% of its income for charitable or religious purposes, no tax will be levied. However, if any violations occur, such income will be taxed.

Concept of Specified Income

The bill also introduces a "Specified Income" category, which consolidates taxability provisions for:

● Anonymous donations (previously under Section 115BBC).

● Taxable specified income (previously under Section 115BBI).

The bill now explicitly states the financial year in which such income will be taxed, eliminating past confusion.

Simplified Application of Income Provisions

The existing Section 11 provisions regarding the application of income have been complex due to multiple explanations and cross-references. The new bill consolidates all application-related provisions in one section, making it easier to determine:

● What qualifies as an eligible application of income.

● The conditions required for the application of income to be tax-exempt.

● Treatment of funds applied from capital corpus and their replenishment.

Elimination of Deemed Application Concept

Previously, deemed application provisions created confusion among taxpayers, leading to errors in filing tax returns. The new bill removes the deemed application concept, ensuring greater clarity and reducing errors.

Enhanced Accumulation Provisions

The five-year accumulation rule remains, but the new bill eliminates restrictions on the purpose of accumulation. Nonprofits can now accumulate funds for any objective within their registered mandate, simplifying compliance requirements.

Want a deeper insight into the Income Tax Bill, 2025? Click here

Conclusion

The bill's structured approach, consolidation of provisions, and improved clarity will benefit both large and small nonprofit entities. By reducing the total word count from 12,800 to 7,600 words, the bill enhances readability and ensures easier compliance for nonprofit organizations. 

The new bill is expected to greatly benefit organizations engaged in social, educational, and religious activities, ensuring they can focus on their core mission rather than grappling with complex tax laws.

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