Tax on accredited Income

Introduction

Non-profit Organizations enjoy several tax exemptions under the Income Tax Act, 2025. However, to prevent misuse of these benefits and to ensure that tax-exempt assets continue to be used for charitable purposes, the law introduced a tax on accreted income. This tax comes into play when a charitable organization ceases to exist, converts into a non-charitable form, or merges in a manner that undermines its charitable status.

Meaning of Accreted Income

“Accreted income” means the amount by which the aggregate fair market value (FMV) of the total assets of the organization as on the specified date exceeds the total liabilities of such organization, computed in accordance with the prescribed method.

Accreted Income= FMV of Total Assets- Total Liabilities

Circumstances under which Accreted Income is Taxable

An NPO is liable to pay tax on accreted income when any of the following events occur:

• 1. Conversion into a non-charitable form: If the Non-profit organization converts into a form not eligible for registration under section 332.
  2. Merger with a non-charitable entity: If it merges with an entity that is;
     • Not having similar charitable objectives, or
     • Not registered under section 332
     • Said merger does not fulfil conditions as may be prescribed.
  3. Failure to transfer assets upon dissolution: If, on dissolution, the organization fails to transfer all its assets to:
     • Another charitable institution registered under 332, and
     • Within a period of 12 months from the end of the month in which dissolution takes place
  4. Failure to revalidate or renew registration: If a required application for registration/renewal is not made in time (and the delay is not condoned).

Rate of Tax on Accreted income 

The tax on accreted income shall be levied at the maximum marginal rate (MMR), which is currently 30% (excluding surcharge and cess). This tax is in addition to any Income Tax chargeable on the total income of the trust or institution.