Impact of Finance Bill 2026 on NPOs

The Finance Minister of India, Ms. Nirmala Sitharaman presented the Union Budget for the financial year 2026–27 on Sunday, February 1, 2026 in Parliament. While the budget may have negatively impacted the stock market, it’s effect on the non-profit sector has been mild. One could say there is nothing in particular to feel concerned or worried about.

As readers may be aware the current Income tax Act 1961 will be replaced by the New Income Tax Act 2025 which will come into effect from 1^st April 2026.

Under the new Income tax Act 2025 provisions pertaining to NPOs are divided into seven parts covering:

1. Registration – Sec. 332 & 333
2. Income of registered NPOs – Sec. 334 to 342
3. Commercial activities by registered NPOs – Sec. 344 to 346
4. Compliances – Sec. 347 to 350
5. Violations – Sec. 351 to 353
6. Donation eligibility u/s. 133(1)(b)(ii) – Sec. 354 (Old Sec. 80G)
7. Interpretation (For various connotations used in the Bill) – Sec. 355

Accordingly, the Finance Bill 2026 has made reference to provisions under the new Income tax Act 2025.

Proposed changes under the Finance Bill 2026

Section 349 (pertaining to compliance under the new law) has been amended to allow registered NPOs to file belated tax return in case they miss the usual deadline of 31^st October. This provision is also available under the current law and is intended to help NPOs regularise the delay without loss of the benefit of tax exemption.

Section 352(4) (pertaining to violations under the new law) explains when tax on accreted income is payable on merger of two entities.

Tax on accreted income is already in existence under section 115TD of the current law.

Section 115TD of the Income Tax Act, 1961, imposes a special ‘exit tax’ on the ‘accreted income’ of charitable trusts or institutions that convert into non-charitable forms, fail to re-register, or merge with non-charitable entities. Taxed at the Maximum Marginal Rate (MMR), this ensures previously tax-exempt assets are taxed upon ceasing charitable activities.

Finance Bill 2026 further clarifies that Tax on accreted income will apply if an NPO merges with:

• any entity that is not a registered NPO; or
• a registered NPO with same/similar objects but merger conditions are not met; or
• a registered NPO with different/dissimilar objects.

Accordingly, a new Section 354A has also been introduced under the Finance Bill 2026 to allow tax-free merger of two registered non-profit organizations having the same or similar objects provided the prescribed merger conditions are satisfied.

Finance Bill 2026 has also removed from list of ‘specified violations’ certain commercial-activity related breaches by NPOs having object of ‘advancement of any other object of general public utility.’ This means if business or commercial income of an NPO falling under the category of ‘advancement of any other object of general public utility’ exceeds the threshold limit of twenty per cent of its total income, there may be tax implications, but it will not automatically trigger cancellation of the NPO registration. This amendment is in alignment with the position under the current law.

When the new Income tax 2025 will come into effect on 1^st April 2026, the eligibility for tax exemption and tax deduction of all currently registered NPOs will remain unchanged, ensuring that those with valid registrations under Sections 12A, 12AA, 12AB, or Section 10(23C) can continue to claim benefits, provided their registrations have not been cancelled.

Under the new law, the fundamental principles pertaining to tax exemption and tax deduction remain unchanged and thus earlier case laws on these issues will also continue to apply.