Updated on 22 August 2025, following the enactment of the Income-Tax (No. 2) Bill, 2025

Introduction

The Income-Tax (No.2) Act, 2025, is a pathbreaking reform in India’s fiscal history, with an aim to revamp the long-outdated Income Tax Act, 1961, that has ruled India’s direct taxation regime for more than six decades. It was introduced in the Lok Sabha on February 13, 2025, and its first draft was subjected to examination by a parliamentary Select Committee, which resulted in its withdrawal on August 8, 2025, owing to drafting mistakes, ambiguities, and inconsistencies discovered. A new version, reflecting the committee’s suggestions, was reintroduced on August 11, 2025, by Finance Minister Nirmala Sitharaman. The bill was passed by the Lok Sabha on August 11, 2025, amid opposition protests, without extensive debate, and subsequently navigated the Rajya Sabha, where modifications were proposed before being returned to the Lok Sabha for final concurrence. It received parliamentary approval on Tuesday, August 12, 2025, and is slated for implementation from April 1, 2026, pending presidential assent.

 

Income-Tax (No.2) Act, 2025, is a landmark revamp of India’s direct tax regime superseding the Income Tax Act, 1961. For non-profit organisations (NPOs)—trusts, societies, institutions, and associations formed for religious, charitable, educational, or public utility purposes—the Act proposes a harmonised and simplified regime that is set to improve transparency, cut litigation, and stop misuse while maintaining tax exemptions for genuine activities.

In the 1961 Act, provisions relating to NPOs were spread over sections 2(15) (meaning of charitable purpose), 10(23C) (exemption in respect of certain institutions), 11 (income of charitable property), 12 (gifts to trusts), 12A/12AA/12AB (procedure for registration), and 13 (denial of exemption in specific circumstances).

These have been reorganized in the new Act under Part B of Chapter XVII (sections 332–355), with exemptions merged into Section 11 and Schedules II–VII.

The Act’s methodology fits into the general purpose of

  • simplification of language,
  • removal of redundancies, and
  • inclusion of judicial interpretations to reduce contentiousness.

For NPOs, some prominent themes are

  • simplified registration,
  • more transparent definitions of application of income,
  • limitation on conducting business-like activities, and
  • widened but qualified exemptions.

Substantive tax rates and fundamental principles mostly remain unchanged while procedural simplifications and additional compliance necessities may facilitate operation for compliant organizations but enforce more demanding scrutiny on others.

Structural Reorganisation and Key Mappings

The Act synthesizes NPO provisions into a specialized sub-chapter, which replaces scattered pieces of legislation with a rational sequence:

  • registration (332–333),
  • computation of income (334–339),
  • application and accumulation (340–342),
  • treatment of capital gains (343),
  • commercial restrictions (344–346),
  • compliances (347–349),
  • cancellations (350–351), and
  • tax on residual/specified incomes (352–353).
  • Section 10(23C) exemptions of the 1961 Act are reallocated in Schedules VII (e.g., universities, hospitals) and other.

 

The below table encapsulates some of the 1961 Act to 2025 Act mappings as per the navigator document:

Original Section (1961 Act) Heading New Section/Schedule (2025 Act)
 2(15) Charitable purpose 2(23) (elaborated to include yoga, relief of poor, education, medical relief, environment preservation, etc.)
 10(23C) Exceptions for funds, hospitals, universities, etc. Schedule VII (different Sl. Nos., i.e., universities: Sl. Nos. 1–9; Prime Minister’s National Relief Fund: Sl. No. 10)
 11(1)(a)–(d) Income on property held for religious/charitable purposes 336 (calculation of taxable regular income)
 11(1)(c) Income utilized outside India 338(a) (exclusions subject to conditions)
 12 Income from contributions 337 (specified income, Table Sl. No. 2)
 12A(1)(ac) Conditions for applicability of sections 11 and 12 332(3)–(4), (9)
 12AA Procedure for registration Omitted (substituted by 332)
 12AB Procedure for fresh/modified registration 332(7)–(8)
 13 Section 11 not to apply in specific situations (e.g., private benefit) 337 (special income, e.g., Table Sl. Nos. 1, 3–5 for abuse)
 13A Political parties’ incomes 12 (separate from NPOs)
 13B Electoral trusts 12
 35AC Expenses on qualifying projects (social/economic) Removed (merged with deductions)
 80G Relief from donations to charitable institutions 133 (with approvals under 354)

This reorganisation simplifies by employing tables (e.g., Schedule VII for exemptions) and formulas to achieve precision, with the likelihood of reducing litigation by eliminating ambiguities in provisos to the 1961 .

Major Changes in Provisions

 

1. Registration and Regime Switching

Unified Registration Process (Section 332):

Replaces the three-tier 12A/12AA/12AB structure with one application for fresh, provisional, or renewed registration. Applications have to be made online, with deadlines for approval (e.g., 1 month for provisional, 6 months for fresh). Changes to objects involve re-application in case of non-compliance with initial objectives.

Validity and Renewal: 

Registrations are 5 years (fresh/renewed) or 3 years (provisional), with auto-renewals. This is in contrast to the indefinite validity under the 1961  after 12AA, and for the first time, brings in periodic reviews so that ongoing compliance is ensured.

Switching Regimes (Section 333):

NPOs may choose between the new regime (exemptions with 85% application) or old provisions, but this is limited to once, with tax consequences on accrued income.

Change:

Does away with the requirement for individual approvals under 10(23C) and 80G; harmonized into one process under 354 for donor deductions.

2. Income Definitions and Computation

Regular Income (Section 335):

Gross receipts minus certain exclusions, such as voluntary contributions, commercial gains to permissible limits, and property income kept for charitable purposes. Does not include corpus donations (Section 339) if reinvested.

Taxable Regular Income (Section 336):

Nil where ≥85% applied/accumulated for objects; else, 30% of shortfall taxed (after option of deemed application under 341(5)–(6), subject to 5 years allowable use).

Specified Income (Section 337):

At 30% irrespective of application, for anonymous gifts (>5% of aggregate), misapplied capital, private benefits, or income from prohibited business activities. Table in 337 has 11 situations for deemed taxing (e.g., undistributed income not utilized within 5 years).

Change:

Widens exception to anonymity in donations to 5% of total donations (earlier only anonymous donations under 1961 ). Introduces concept of “deemed accumulated income” for shortfalls, bringing flexibility but with time limit for utilization. 

3. Application and Accumulation of Income

Application Rules (Section 340–341):

85% of normal income should be utilized in India on registered objects; covers capital expenditure if on objects. Shortfalls (up to 15%) can be carried forward for 5 years as deemed application.

Accumulation (Section 342):

Up to 15% may be retained without limit; over this needs Form 10 notice and 5-year application. Misapplication invokes tax under 337.

Capital Gains (Section 343):

Not liable if reinvested in new assets for charitable objectives; partial relief for mixed trusts.

Change:

Clarifies foreign application (only for pre-1952 trusts or international welfare); prohibits inter-NPO transfers of accumulation without charge.

4. Limitations on Commercial activities

General Restriction (Section 344):

NPOs not allowed to have shares in companies (except public sector or subsidiaries for objects); required to divest within 1 year if obtained after commencement.

Permissible activities (Sections 345–346):

Incidental business permitted if ≤20% of receipts for general public utility NPOs; should have separate books. Exceeding attracts taxation on excess as specified income.

Change:

Clarifies 1961 ‘s loose “incidental” criteria, consistent with judicial decisions (e.g., limiting trade-like activities) to avert commercial abuse.

5. Compliances and Cancellations

Audits and Reporting (Section 347–349):

Required audit if income >₹5 lakh; filing of Form 10B/10BB. Failure results in taxation under 352.

Cancellation (Section 350):

Reasons include non-genuine operations, private benefits, or infringement of other laws (e.g., FCRA). Appeals to ITAT.

Change:

Incorporates FCRA-type checks; surplus assets on winding up must be donated to similar NPOs within 12 months, otherwise taxed.

6. Donor Deductions (Section 133, 354)

Approvals:

Standalone approval for 80G-eligibility under 354, 5 years’ validity.

Change:

Streamlines but makes NPOs keep records of donors; 50%/100% deductions capped remain the same.

Effects on Non-Profit Organisations

Positive Effects

Simplification and Reduced Litigation:

Consolidation of provisions using tables/formulas eliminates ambiguity in the 1961  and could lower disputes (e.g., regarding “charitable purpose” or application). Expert estimates put the decline in NPO-related appeals at 20–30%.

Income Management Flexibility:

Deemed application and carry-forward of 5 years for shortfalls  as cushions during times of crisis (e.g., pandemics) for smaller NPOs. Increased 5% exemption on overall donations facilitates fundraising.

Clarification on Commercial activities:-  

Clearly defined 20% limit stimulates long-term revenue generation (e.g., services fees) without forfeiting exemptions, promoting self-sufficiency.

Congruence with International Standards:

Includes digital compliance (e.g., e-filing) and anti-avoidance, boosting credibility among international funding parties.

Economic Boost:

For education and health sectors (Schedule VII), exemptions are strong, favouring SDGs and “Viksit Bharat” objectives.

Negative or Challenging Impacts

Stricter Compliances:

Renewals from time to time and combined checks of laws (e.g., FCRA) raise administrative costs; non-compliance may result in full taxation or cancellation, hitting grassroot NPOs with fewer resources disproportionately.

Tax Risks:

Identified incomes taxed at 30% (such as surplus anonymous gifts, misappropriations) may stretch finances if left unchecked. Winding-up rules would make dissolutions difficult.

Activity Restrictions:

20% limit on business receipts for general utility NPOs restricts scalability; international application restricts global charities.

Transition Issues:

Current registrations under 12AB/10(23C) require re-application within timeframes, with possible disruption during switch-over.

Privacy and Scrutiny:

Increased powers for tax authorities (e.g., electronic access in searches) are a cause for concern for NPOs dealing with sensitive information.

Overall Assessment

  • The  encourages a “taxpayer-friendly” regime for NPOs by ensuring exemptions with responsibility, preventing abuse (e.g., through private benefits under 13/337) whilst facilitating genuine ones.
  • Greater NPOs with strong governance will welcome certainty, but smaller ones might require capacity-building.
  • Revenue implications are neutral, as exemptions persist, but compliance could boost voluntary disclosures.
  • Long-term, it aligns with OECD standards and reduces India’s tax appeal backlog. However, implementation success depends on CBDT rules and training, with vigilant monitoring to avoid overreach.