India Reforms Tax Framework For Non-Profit Sector

India's Income Tax Act, 2025, has introduced reforms to simplify the tax regulatory framework for non-profit organisations (NPOs). The new law brings trusts, societies, and educational institutions under a unified framework and replaces the three-tier structure of Sections 12A, 12AA, and 12AB with a single online registration process.

The government has also shown willingness to refine the law based on stakeholder feedback. For example, concerns over the proposed 30% tax on anonymous donations led to the restoration of exemptions for wholly religious institutions.

However, challenges remain, including the 85% rule, which requires NPOs to apply at least 85% of their income towards their stated objectives within the same financial year. This rule can constrain legitimate long-term planning, as development work often requires years of preparation.

To address these challenges, experts recommend allowing NPOs to build long-term financial resilience by investing accumulated funds in diversified growth-oriented instruments. They also suggest moving from rigid expenditure mandates to outcome-based accountability and revisiting commercial income thresholds to encourage mission-linked revenue generation and philanthropy.

Additionally, experts propose introducing incentives to encourage charitable giving, such as enhanced tax deductions or matched contributions for priority sectors.

These reforms aim to treat the non-profit sector as a partner in development, recognizing its critical role in driving social transformations in India.