Can a Charitable Trust, NGO, Society or Section 8 Company Lose Income-Tax Exemption?

Yes. Registration as a charitable or religious organisation does not create an unconditional tax exemption. The organisation must continue to satisfy the conditions prescribed by the income-tax law. From 1 April 2026, the Income-tax Act, 2025 governs Tax Year 2026-27 and later years. Section 13 of the Income-tax Act, 1961 remains important for earlier assessment years and transitional disputes.

Current Law: Income-tax Act, 2025

The Income-tax Act, 2025 applies from 1 April 2026. The charitable and religious exemption regime is reorganised under the provisions dealing with registered non-profit organisations. Regular registration is obtained under Section 332, while approval relevant to eligible donations is dealt with under Section 354.

The current e-Filing system uses Form 105 for specified applications for regular registration under Section 332(3), regular approval under Section 354(2), or both. Orders are issued in Form 107.

Tax on Specified Income of Registered Non-Profit Organisations

Under the Income-tax Act, 2025, a registered non-profit organisation is subject to the special tax regime provided in Chapter XVII. Section 334 provides for tax on specified income at 30%, while other taxable income is dealt with under the applicable provisions of the Act.

This approach is important because a prohibited transaction or misuse of income does not necessarily mean that every rupee of the organisation's income automatically loses charitable treatment. The precise consequence must be identified under the relevant provision.

Specified Violations and Cancellation of Registration: Section 351

Section 351 of the Income-tax Act, 2025 identifies circumstances that can constitute a specified violation. These include, among other matters:

• application of income for purposes other than the organisation's objects;
• commercial activity in contravention of Section 345;
• application of income for private religious purposes that do not benefit the public;
• application of income by a qualifying charitable organisation for the benefit of a particular religious community or caste, subject to the statutory exceptions;
• activities that are not genuine or are not carried out in accordance with registration conditions;
• specified non-compliance with another law where the statutory conditions are satisfied; and
• false or incorrect information in the registration application.

If the Principal Commissioner or Commissioner is satisfied, after the prescribed inquiry and reasonable opportunity of hearing, that one or more specified violations have occurred, registration may be cancelled for the relevant tax year and subsequent tax years in accordance with Section 351.

Benefits to Founders, Trustees and Other Related Persons

Transactions that confer an improper private benefit on founders, trustees, managers, substantial contributors, relatives or connected concerns remain high-risk. Typical issues include:

• interest-free or inadequately secured loans;
• personal use of organisation property;
• excessive salary or remuneration;
• sale of property to a related person for inadequate consideration;
• purchase of property from a related person at an excessive price; or
• other direct or indirect diversion of charitable assets for private benefit.

Not every transaction with a trustee or related person is automatically prohibited. The terms, consideration, statutory exceptions and law applicable to the relevant tax year must be examined.

Investment and Deposit Restrictions

Charitable and religious organisations are subject to statutory restrictions governing how funds may be invested or deposited. Investments outside permitted modes can affect the tax treatment of the income or investment concerned. Organisations should periodically review all bank deposits, securities, shares, immovable-property holdings and other investments against the provisions applicable to the relevant year.

Commercial and Business Activities

Under the current Act, Section 345 restricts commercial activities of registered non-profit organisations unless the commercial activity is incidental to attainment of the organisation's objectives and separate books of account are maintained.

For organisations advancing an object of general public utility, Section 346 contains the special commercial-activity framework, including the statutory 20% receipts condition. Current registration conditions also require separate books for commercial activities.

Accordingly, the mere existence of business receipts does not by itself justify the statement that exemption is permanently "forfeited". The nature of the activity, the statutory category of the organisation, the receipt limit, maintenance of separate books and the specific tax-year consequence must be examined.

Private Religious Purposes and Particular Communities or Castes

A registered non-profit organisation may face adverse consequences where income is applied for private religious purposes that do not enure for the benefit of the public. The current Act also contains restrictions concerning charitable organisations applying income for the benefit of a particular religious community or caste, with statutory protection for specified groups such as Scheduled Castes, Scheduled Tribes, backward classes, women and children.

Activities Outside the Organisation's Objects

Application of income for purposes outside the registered objects is expressly important under the current law. Governing bodies should therefore ensure that grants, projects, administrative expenditure and deployment of assets remain demonstrably connected with the organisation's objects.

False Information and Non-Genuine Activities

Registration can also be affected where activities are not genuine, are not conducted in accordance with registration conditions, or the registration application contains false or incorrect information. Current registration conditions further require compliance with applicable laws in the circumstances specified by the Act.

Section 13 of the Income-tax Act, 1961: Earlier Assessment Years

For years governed by the Income-tax Act, 1961, Section 13 remains the principal anti-abuse provision limiting the exemptions otherwise available under Sections 11 and 12.

Important Section 13 situations include:

1. Section 13(1)(a): income from property held under a private religious trust that does not enure for the benefit of the public;
2. Section 13(1)(b): specified charitable trusts or institutions created for the benefit of a particular religious community or caste, subject to statutory exceptions;
3. Section 13(1)(c): direct or indirect benefit to persons specified in Section 13(3); and
4. Section 13(1)(d): investments or deposits contrary to the permitted investment framework, subject to applicable exceptions.

Who were "specified persons" under Section 13(3)?

They broadly included the author or founder, substantial contributors, trustees or managers, certain relatives, and concerns in which specified persons had substantial interest. The exact statutory wording applicable to the assessment year should always be checked.

Section 115BBI, Section 271AAE and Section 115TD for Earlier Years

For assessment years governed by the 1961 Act, consequences could extend beyond ordinary denial of exemption. Depending on the facts and year, specified income could be taxed under Section 115BBI, penalties could arise under Section 271AAE for certain benefits to specified persons, and tax on accreted income under Section 115TD could apply in specified cases involving cancellation, conversion, merger or dissolution.

These provisions remain relevant when dealing with assessments, appeals, reassessments or other proceedings for years governed by the Income-tax Act, 1961.

Practical Examples

Example 1: Personal use of trust property

A trustee occupies residential property belonging to the organisation for personal purposes without satisfying the applicable statutory conditions. This can create a private-benefit issue and should be examined under the law governing the relevant year.

Example 2: Prohibited investment

An organisation invests funds in a mode that is not permitted under the applicable charitable-institution investment rules. The tax consequences can attach to the affected investment or income and must be determined under the relevant statutory provision.

Example 3: Incidental commercial activity

A charitable organisation carries on a commercial activity genuinely incidental to its objectives and maintains separate books. The existence of revenue from the activity does not, by itself, establish permanent loss of charitable registration.

Example 4: Interest-free personal loan

An organisation lends charitable funds to a trustee for personal use without commercial justification or statutory protection. Such a transaction is a serious compliance risk and can trigger tax and registration consequences.

Compliance Checklist for Charitable Trusts, Societies and NGOs

• Activities remain within the organisation's registered objects.
• Income and property are not diverted for private benefit.
• Related-party transactions are documented and reviewed.
• Trustee and management remuneration is reasonable and authorised.
• Investments and deposits comply with the permitted statutory framework.
• Separate books are maintained for commercial activities where required.
• Commercial activities remain within the conditions applicable to the organisation.
• Books of account and supporting documents are properly maintained.
• Audit and return-filing requirements are met.
• Donation statements and donor certificates are furnished where applicable.
• Registration under the provisions applicable to the current tax year remains valid.
• Changes to objects are reported or re-registered where required.
• No false or incorrect information is furnished in registration or approval applications.
• Compliance with other applicable laws is monitored.

Current Law Compared with Earlier Section 13 Framework

Conclusion

A charitable trust, society, NGO or Section 8 company can face loss of tax benefits if it violates the applicable income-tax conditions. However, the correct legal consequence is not always complete "forfeiture" of exemption. Depending on the provision, the result may be taxation of specified income, denial of exemption for affected income, or cancellation of registration.

For Tax Year 2026-27 onward, organisations should use the Income-tax Act, 2025, including Sections 332, 334, 345, 346 and 351 and the Income-tax Rules, 2026. For earlier years, Section 13 and the connected provisions of the Income-tax Act, 1961 remain relevant.

Disclaimer: This page provides general information. Tax consequences depend on the organisation's objects, activities, registration status, transactions and the tax year involved. For proceedings relating to earlier assessment years, the Income-tax Act, 1961 and amendments applicable to those years must be considered separately.