Section 354 Income Tax Act 2025: How Can an NGO Obtain Approval for Donor Tax Deductions?
Section 354 establishes the application and approval procedure for a registered non-profit organisation (NPO), or an eligible person listed in Schedule VII, seeking approval for the purpose of the donor deduction under Section 133(1)(b)(ii). It sets eligibility conditions, deadlines, approval periods and procedures for examination and rejection.
Who can apply under Section 354?
Under Section 354(1), a registered non-profit organisation or a person referred to in Schedule VII (Table: Sl. No. 1) may apply in the prescribed form and manner to the Principal Commissioner or Commissioner for approval for the purpose of Section 133(1)(b)(ii). The provision concerns approval relevant to a donor's deduction; it is not itself a blanket guarantee that every donation is deductible.
What are the seven conditions in Section 354(1)?
- Clause (a): No particular religious community or caste. The applicant must not be expressed to be for the benefit of any particular religious community or caste.
- Clause (b): Indian establishment and religious expenditure ceiling. It must be established in India for a charitable purpose, and expenditure of a religious nature must not exceed 5% of total income during a tax year.
- Clause (c): Charitable asset-use restriction. Its constituting instrument or governing rules must not permit transfer of any or all assets, at any time, for a purpose other than a charitable purpose.
- Clause (d): Regular accounts. It must maintain regular accounts of receipts and expenditure.
- Clause (e): Prescribed statement. It must prepare and deliver the prescribed statement, with prescribed particulars, verification and time limit, to the prescribed income-tax authority or authorised person.
- Clause (f): Correction statement. It must furnish a correction statement to rectify mistakes or add, delete or update information supplied under clause (e), in the prescribed form and verification manner.
- Clause (g): Donor certificate. It must furnish the donor a certificate stating the donation amount, containing prescribed particulars and within the prescribed period from receipt.
Details such as forms, statement formats and delivery methods depend on applicable rules and notifications. Section 354 itself delegates those details to prescription.
When must an application be made and how long is approval valid?
Section 354(2) sets out five cases. The time limit for passing an order is calculated from the end of the month in the first case and from the end of the quarter in the remaining cases.
| Case | Application deadline | Order deadline | Approval validity |
|---|---|---|---|
| 1. Activities not commenced | At any time during the tax year from which approval is sought | One month from the end of the month of application | Three tax years commencing from the tax year in which the application is made |
| 2. Activities commenced | At any time during the tax year from which approval is sought | Six months from the end of the quarter of application | Five tax years commencing from the tax year in which the application is made |
| 3. Provisional approval held and activities commenced | Within six months of commencement of activities | Six months from the end of the quarter of application | Five tax years commencing from the tax year in which the application is made |
| 4. Provisional approval expiring; activities not commenced | At least six months before provisional approval expires | Six months from the end of the quarter of application | Five tax years following the tax year in which the application is made |
| 5. Existing approval expiring | At least six months before the approval expires | Six months from the end of the quarter of application | Five tax years following the tax year in which the application is made |
How does the Principal Commissioner or Commissioner decide?
Cases 2 to 5: examination under Section 354(3)
The authority may request documents or information and make inquiries to verify the genuineness of activities and compliance with other laws material to achieving the applicant's objects.
- If satisfied: It must issue a written order granting approval.
- If not satisfied in case 2: After a reasonable opportunity of being heard, it must issue a written order rejecting the application.
- If not satisfied in cases 3 to 5: After a reasonable opportunity of being heard, it must issue a written order rejecting the application and cancelling the approval.
A copy of the order must be sent to the applicant and the Assessing Officer.
Case 1: provisional approval under Section 354(4)
Where activities have not commenced and the application falls under case 1 of the table, the Principal Commissioner or Commissioner must pass an order granting provisional approval. The three-tax-year period specified in the table applies.
Relevant statutory expressions
Practical illustrations
New organisation with no activities
An eligible charitable organisation applying during tax year 2026-27 before commencing activities falls within case 1. Its application may receive provisional approval valid for three tax years commencing with 2026-27, subject to the statutory conditions.
Organisation with ongoing activities
If an eligible applicant has commenced activities and applies during tax year 2026-27, case 2 provides for an inquiry-based decision within six months from the end of the quarter of application, with a five-tax-year approval period commencing from the application tax year if granted.
Religious expenditure test
If total income is Rs. 20 lakh for a tax year, the 5% threshold mentioned in Section 354(1)(b) is Rs. 1 lakh. Religious expenditure exceeding that amount would not meet that clause. Other statutory conditions must also be met.
Frequently asked questions
Is approval under Section 354 the same as registration under Section 332?
No. Section 332 concerns registration of an NPO, while Section 354 concerns approval for the donor deduction specified in Section 133(1)(b)(ii).
Can an organisation apply before starting its activities?
Yes. Case 1 of the table provides for an application before activities commence and provisional approval.
What is the time limit for renewing an existing approval?
Case 5 requires an application at least six months before expiry of the existing approval.
Is an applicant entitled to a hearing before rejection?
Section 354(3)(b) requires a reasonable opportunity of being heard before rejection in cases 2 to 5.
Does an approved NGO have donor-reporting obligations?
Yes. Section 354(1)(e) to (g) addresses prescribed donation statements, corrections and donor certificates.
Related provisions and official text
Read Section 332: Registration, Section 349: Return of income, and Section 351: Specified violation. Consult the official consolidated Income-tax Act, 2025 (as amended by Finance Act, 2026) for the statutory text.
Updated: 12 November 2026. This article is general legal information; check current prescribed forms, rules and notifications before filing.