Adv. (Dr.) Manoj Fogla, CA. Suresh Kumar Kejriwal & CA. Tarun Kumar Madaan – [2026] 182 taxmann.com 538 (Article)
1. Introduction
The Income-tax Act, 2025 is a new Indian tax legislation enacted by Parliament and assented to by the President on 21 August 2025. It is intended to replace the Income-tax Act, 1961 and is scheduled to come into force from 1st April 2026. The enactment of the 2025 Act represents a comprehensive consolidation and restructuring of income-tax law, including the recodification of the framework governing Non-Profit Organisations (NPOs).
As recorded in the Report of the Select Committee on the Income-tax Bill, 2025 (para 1.9), the stated objectives of the legislative exercise were to maintain continuity in taxation principles, ensure no major tax policy or tax rate changes, and bring clarity and simplification without disturbing long-settled principles of taxation, while incorporating amendments made over time.
Within this framework, the Income-tax Act, 2025 introduces a significant structural reorganisation of charitable taxation. The regime applicable to NPOs has been shifted from an exemption-based model under the Income-tax Act, 1961 to a dedicated, compliance-oriented framework under Chapter XVII-B. This reorganisation seeks to achieve consolidation, uniformity, and administrative clarity in the taxation of non-profit entities.
While the structural overhaul is, in principle, commendable, a close examination of the provisions relating to NPOs reveals several legal, conceptual, and operational anomalies. If left unaddressed, these issues have the potential to undermine genuine charitable activity, expand administrative discretion, and generate avoidable litigation, outcomes that would be inconsistent with the express objective of continuity without substantive policy change.
Budget 2026 assumes particular significance in this context. To be presented in February 2026, it will be the first Union Budget after the enactment of the Income-tax Act, 2025, yet before its commencement. This creates a rare and important legislative opportunity to correct structural inconsistencies and clarify ambiguities before the new law is operationalised, rather than after disputes and litigation have already arisen.
This article identifies key structural issues in the NPO framework under the Income-tax Act, 2025 that merit legislative correction in Budget 2026, with the objective of ensuring that the new regime functions as a coherent, proportionate, and facilitative framework for non-profit organisations, fully aligned with the stated intent of the 2025 Act.
1. Entity Constitution in India as a Condition for Registration: Exclusion of Foreign Charities
Under the Income-tax Act, 1961, there was no explicit statutory requirement that a charitable institution be constituted, registered, or incorporated in India in order to claim exemption under sections 11 and 12. The eligibility for exemption depended primarily on the income derived from property held under trust wholly for chartable or religious purpose, nature of activities, the application of income for charitable purposes in India , and registration under section 12A/12AB, rather than on the place of incorporation/registration.
Judicially, this position was well recognised. In Educational Institute of American Hotel and Motel Association v. CIT [1996] 219 ITR 183 (AAR), a foreign organisation conducting educational and training activities in India was held eligible for exemption under section 10(22), as it satisfied the substantive conditions of charitable purpose and absence of profit motive. Similarly, in Oxford University Press v. CIT [2001] 247 ITR 658 (SC), while exemption was denied on facts, the Supreme Court did not reject the claim merely because the assessee was a foreign entity; rather, the decision turned on the nature of activities carried on in India, which were found not to be charitable.
The Income-tax Act, 2025 marks a clear departure from this position. Section 332(2)(a) expressly provides that a person shall be eligible for registration only if such person is constituted, registered, or incorporated in India for carrying out one or more charitable or public religious purposes. This is a new and substantive eligibility condition, which did not exist under the 1961 Act.
By introducing this requirement, the 2025 Act establishes a strict territorial nexus for charitable registration. As a consequence, foreign charitable entities operating in India through branches, liaison offices, project offices, or other unincorporated forms are categorically excluded from seeking registration under the new NPO regime. Only entities legally recognised under Indian law, such as trusts, societies, section 8 companies, or other incorporated forms, can qualify for registration.
This represents more than a procedural refinement; it constitutes a structural policy shift. Under the earlier regime, foreign charities could access exemption in India if their activities were charitable in nature and carried out within India. Under the 2025 Act, such entities are excluded at the threshold, irrespective of the nature or location of their activities, unless they undergo incorporation or registration in India.
The distinction becomes particularly significant when contrasted with the historical treatment under section 10(23C). Although section 10(23C) did not expressly restrict activities to India, the Supreme Court in American Hotel & Lodging Association Educational Institute v. CBDT [2007] 158 Taxman 146 (SC) clarified that institutions seeking exemption under section 10(23C) must be primarily engaged in activities in India, even though incidental activities abroad were not expressly prohibited. Thus, under the 1961 Act, the test remained activity-based, not incorporation-based.
By contrast, the Income-tax Act, 2025 adopts a form-based exclusion, effectively denying access to the charitable tax regime to foreign entities irrespective of whether their dominant activities are carried out in India and for Indian beneficiaries. This shift is not expressly acknowledged as a policy change, notwithstanding the stated objective of maintaining continuity without substantive alteration of long-settled principles.
Legislative clarification is therefore necessary to determine whether the exclusion of foreign charitable entities from registration under the 2025 Act is an intentional policy decision or an unintended consequence of structural redrafting. Budget 2026 should clarify whether foreign charities carrying on bona fide charitable activities in India should be permitted access to the NPO regime subject to appropriate safeguards, consistent with the historical approach under the 1961 Act.
2. Removal of the Term “Legal Obligation”
Under the Income-tax Act, 1961, the charitable taxation framework consistently recognised not only property held under a trust, but also property held under a “legal obligation” wholly for charitable or religious purposes.
This position was statutorily reinforced by Explanation 1 to section 13 of the 1961 Act, which expressly provided that, for the purposes of sections 11, 12, 12A, 12AA, 12AB and section 13, the expression “trust” includes any other legal obligation. The effect of this Explanation was to expand the scope of charitable institutions beyond formally constituted trusts, by bringing within its fold arrangements where property was legally bound to charitable or religious purposes even in the absence of a formal trust deed.
Judicially, the expression “legal obligation” acquired a well-settled and expansive meaning. Courts consistently interpreted it to include any enforceable duty recognised by law, provided that the property was irrevocably dedicated to charitable or religious purposes and its application could be legally compelled. The concept was deliberately framed in wide terms to accommodate forms of charitable dedication that did not conform to the technical requirements of a trust under the Indian Trusts Act.
Accordingly, courts held that a “legal obligation” could arise from, inter alia:
• statutes governing religious or charitable endowments;
• customary or traditional dedications recognised by law;
• wakf-type arrangements under personal or religious law;
• long-standing usage or practice creating enforceable charitable duties; or
• obligations imposed under court decrees or statutory schemes.
As a result, religious endowments, wakfs, temples, maths, gurdwaras, dharmashalas, and other customary charitable institutions, many of which were not constituted as formal trusts or registered legal entities, were nevertheless brought within the protective ambit of charitable taxation, so long as the property was held under an enforceable charitable or religious obligation.
The Income-tax Act, 2025 departs from this settled statutory and judicial position by omitting any reference to “legal obligation” and by restructuring charitable taxation around registration of “non-profit organisations” constituted or registered in specified juridical forms. This omission creates a potential exclusionary gap. In the absence of an express recognition of legal obligations, there is a real risk that:
• religious or charitable endowments governed by customary law;
• wakfs and similar institutions under personal law;
• institutions holding property under statutory or court-mandated schemes; and
• charities operating under long-standing dedication without formal trust instruments
may be denied coverage under the NPO regime, not because of misuse or commercialisation, but purely due to their juridical form.
Budget 2026 should therefore expressly reintroduce the concept of “property held under trust or legal obligation” within the definition or eligibility framework of registered non-profit organisations, or provide a clarificatory provision deeming property held under statutory, customary, religious, or judicially recognised charitable obligations to be eligible under the NPO regime, notwithstanding the absence of a formal trust structure.
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