Under the Income-tax Act, 1961, Chapter XII-EB deals with the taxation of accreted income of certain specified entities, including charitable and non-profit organisations (NPO). Section 352(4) provides that a specified person shall be liable to pay tax on accreted income in situations such as conversion, dissolution, or merger.
As per Serial No. 8 of the Table under Section 352(4), where a specified person merges with any entity other than a registered non-profit organisation having the same or similar objects, tax on accreted income becomes payable.
However, a significant legislative gap existed. While Section 12AC of the Income-tax Act allows and regulates mergers between registered non-profit organisations with the same or similar objects, Section 352 did not explicitly exempt such mergers from accreted income tax. This created uncertainty and the potential for unintended tax exposure during genuine charitable restructurings.
The Legislative Gap and the Need for Amendment
The existing provisions of Section 352(4) failed to capture situations where one registered non-profit organisation merged with another registered non-profit organisation having the same or similar objects, even though such mergers are statutorily recognised and regulated under Section 12AC.
As a result, bona fide mergers undertaken for administrative efficiency, consolidation of charitable activities, or better governance faced the risk of being treated as taxable events under the accreted income framework.
To address this inconsistency and align Chapter XII-EB with the broader charitable regime under the Income-tax Act, the legislature has proposed targeted amendments.
Introduction of New Section 354A: Key Relief for NPOs
To provide clarity and certainty, it is proposed to insert a new Section 354A in the Income-tax Act, 1961.
What Section 354A Provides?
Under the newly proposed Section 354A, the provisions of Section 352 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.
In essence, no tax on accreted income will be levied in cases of eligible NPO-to-NPO mergers that satisfy the statutory and prescribed conditions.
This amendment brings the accreted income tax provisions in harmony with the charitable registration and merger framework under Section 12AC.
Amendments to Section 352(4): When Accreted Income Tax Will Apply
Alongside the insertion of Section 354A, the legislature has also proposed amendments to Serial No. 8 of the Table under Section 352(4) to clearly specify the circumstances in which accreted income tax will continue to apply.
Post-amendment, a specified person will be liable to pay tax on accreted income where it merges with:
- An 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 that does not have the same or similar objects.
This ensures that the exemption is not blanket, but carefully restricted to genuine charitable mergers that preserve the character and objectives of the non-profit sector.
Effective Date and Applicability
The amendments, including the insertion of Section 354A, will take effect from 1 April 2026.
Accordingly, they will apply to:
- Assessment Year 2026-27, and
- All subsequent tax years.
Mergers undertaken prior to this date will continue to be governed by the existing legal position.
Conclusion
The insertion of Section 354A marks a thoughtful and necessary reform in the taxation of non-profit organisations. By explicitly exempting eligible NPO mergers from accreted income tax, effective from April 2026, the legislature has addressed a long-standing anomaly and reinforced the policy intent of supporting genuine charitable activities.
Non-profit organisations contemplating mergers should, however, carefully evaluate object similarity and compliance with prescribed conditions, as failure to meet these requirements can still trigger substantial tax liability under Section 352.
