Clause 70 of the Finance Bill, 2026 proposes to insert a new section 354A in the Income-tax Act, 2025, dealing with the tax consequences of merger of registered non-profit organisations (NPOs).
The amendment provides conditional relief from tax on accreted income where a registered NPO merges with another registered NPO having the same or similar objects, and the merger satisfies prescribed conditions. Simultaneously, section 352(4) is amended to clearly identify cases where accreted income tax will continue to apply.
These amendments take effect from 1 April 2026, i.e., tax year 2026-27 onwards.
Existing Framework: Accreted Income on Merger
Section 352 – Accreted Income
Section 352 of the Income-tax Act, 2025 provides for taxation of accreted income of a registered NPO in specified circumstances. Accreted income broadly represents the net asset value of the organisation.
Under section 352(4) (Table – Sl. No. 8), accreted income tax is attracted where a registered NPO merges with:
- an entity other than a registered NPO, or
- a registered NPO not having the same or similar objects
However, unlike the position under section 12AC of the Income-tax Act, 1961, the 2025 Act did not explicitly deal with mergers between registered NPOs having the same or similar objects, creating a legislative gap.
What Does Clause 70 of Finance Bill 2026 Propose?
Clause 70 introduces two linked amendments:
1. Insertion of New Section 354A
A new section 354A is proposed to provide that:
Where a registered non-profit organisation has merged with any other registered non-profit organisation, the provisions of section 352 shall not apply, if-
(a) the other registered non-profit organisation has the same or similar objects; and
(b) the merger fulfils such conditions as may be prescribed by rules.
This creates a conditional carve-out from accreted income taxation for qualifying mergers.
2. Amendment to Section 352(4) – Table (Sl. No. 8)
To align section 352 with the newly inserted section 354A, the Table under section 352(4) is amended to provide that accreted income tax shall apply where a registered NPO has merged with:
(a) any entity other than a registered non-profit organisation;
(b) a registered non-profit organisation having the same or similar objects, but the merger does not fulfil prescribed conditions; or
(c) a registered non-profit organisation that does not have the same or similar objects.
This amendment clearly demarcates tax-neutral and taxable merger scenarios.
Meaning of the Proposed Amendment
In substance, the amendment establishes the following framework:
- Merger of two registered NPOs can be outside the scope of accreted income tax, only if:
- their objects are the same or similar, and
- the merger complies with conditions prescribed by rules
- If any condition fails, section 352 applies and accreted income becomes taxable
The relief is therefore conditional and rule-dependent, not automatic.
Rationale for the Amendment
- Under the Income-tax Act, 1961, section 12AC permitted mergers of charitable institutions with similar objects without triggering accreted income tax
- The absence of a corresponding provision in the 2025 Act could lead to unintended taxation of genuine NPO reorganisations
- Clause 70 restores parity and continuity with the earlier legislative framework
Implications of the Proposed Change
1. Enables Genuine NPO Restructuring
- Facilitates consolidation of NPOs with aligned objectives
- Supports administrative efficiency and better utilisation of charitable assets
2. Relief Is Conditional and Regulated
- Compliance with prescribed conditions will be critical
- Tax neutrality depends on both object similarity and rule compliance
3. Clear Consequences for Non-Qualifying Mergers
- Mergers with:
- non-NPO entities,
- NPOs with dissimilar objects, or
- NPOs with similar objects but non-compliant mergers
will continue to attract tax on accreted income, removing ambiguity.
What the Amendment Does Not Do
- ❌ It does not exempt all NPO mergers
- ❌ It does not dilute the accreted income tax regime
- ❌ It does not dispense with registration or compliance requirements
The amendment provides targeted relief, not a blanket exemption.
Effective Date
✔ Applicable from 1 April 2026. Applies to tax year 2026-27 and subsequent tax years.
Conclusion
Clause 70 of the Finance Bill, 2026 introduces a carefully structured mechanism governing the tax treatment of mergers between registered non-profit organisations. By inserting section 354A and amending section 352(4), the law now clearly distinguishes tax-neutral mergers from taxable ones, based on object similarity and compliance with prescribed conditions.
The amendment restores alignment with the earlier law, prevents unintended tax exposure, and supports legitimate consolidation in the non-profit sector, while preserving necessary safeguards.
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