India’s Income-Tax Act 2025: New RNPO Compliance Rules for Charities and Overseas Donors

India’s Income-tax Act, 2025 reorganises the tax exemption framework for charitable and religious organisations from April 1, 2026, applying to Tax Year 2026-27. The law replaces the terminology and section structure of the Income-tax Act, 1961, while retaining the requirement that eligible organisations apply or properly accumulate income for approved purposes.

The framework covers charitable trusts, religious institutions, societies, Section 8 companies and other non-profit organisations. It commonly refers to an eligible organisation as a Registered Non-Profit Organisation, or RNPO.

Tax exemption is not automatic. Running a school, hospital, temple, scholarship programme or poverty-relief project does not by itself qualify an organisation for relief.

The tax authority examines registration, the type of income received, how money was used, the source of funds, accumulation, filing deadlines, investment rules, TDS, payment restrictions and related-party transactions. The central question is whether spending qualifies as application of income under the law.

For charities receiving funds from NRIs, OCI cardholders, foreign foundations or overseas companies, FCRA compliance remains a separate issue from income-tax treatment. A charity’s tax approval does not itself authorise it to receive every foreign contribution.

Section 332 registration starts the RNPO process

An organisation seeking the RNPO exemption framework ordinarily needs valid registration under Section 332. The Income Tax Department uses Form 105 for regular registration and, when separately requested, approval under Section 354. An approved application results in an order containing a Unique Registration Number.

The two approvals serve different purposes. Section 332 registration concerns the organisation’s own exemption. Section 354 approval concerns whether an eligible donor can claim a deduction under Section 133(1)(b)(ii).

An RNPO seeking donor deductions must maintain accounts, file prescribed donation statements and issue the required donation certificate. Its own income may qualify for exemption even when a particular payment does not qualify for a deduction in the donor’s hands.

Receipt classification determines the exemption calculation

The calculation begins by separating receipts into statutory categories.

Regular income can include proceeds from charitable or religious activities, property income, voluntary contributions, deposits and investments, and gains from permitted commercial activity connected with the organisation’s objects. School fees, hospital receipts, rent, bank interest, general donations and compliant incidental business income can fall into this stream.

A corpus donation requires a specific direction from the donor that the contribution form part of the organisation’s corpus. The amount must also be invested or deposited separately in a mode permitted under Section 350. Trustees cannot create corpus treatment simply by labelling a receipt that way.

Specified income covers receipts and transactions arising from statutory defaults or prohibited conduct. Examples include taxable anonymous donations, benefits to related persons, income applied outside India without required approval, prohibited investments, misuse of accumulated income, failure to use accumulated income within the permitted period, transfers of accumulated income to another RNPO and deemed application that is not later used within the required period.

Section 334 taxes specified income at 30%. Taxable regular income and residual income use the rates otherwise applicable under the Act.

Paid expenditure generally counts as application

Section 341 generally recognises spending when the organisation pays it during the tax year, uses it for its registered purposes, applies it in India unless approved overseas application applies, and follows statutory payment and TDS restrictions.

Both revenue and capital spending can qualify. Teachers’ salaries, scholarships, textbooks, classrooms, school buses and laboratory equipment may all count for an educational RNPO when the statutory conditions are met.

Payment timing matters.

A provision recorded in the accounts does not necessarily qualify if the organisation has not paid the amount. An RNPO that records ₹12 lakh in staff salary expenditure before year-end but pays only ₹10 lakh cannot automatically treat the unpaid ₹2 lakh like the amount already paid.

The accounts may therefore show a different expenditure figure from the tax computation. Section 341 focuses substantially on payment when recognising application.

Loans and corpus spending receive different treatment

The source of money can delay recognition. If a trust builds a hospital wing costing ₹50 lakh from current-year regular income, the payment may qualify as application in that year, subject to the other conditions.

Borrowed funds work differently. Construction financed with a bank loan is not immediately treated as application of current-year regular income. Recognition arises when the organisation repays the borrowing from income, provided repayment is completed within five years from the end of the tax year in which the borrowed funds were used and the other conditions are met.

Corpus funds follow the same principle. The initial withdrawal is not application of regular income. Money deposited back into the separately maintained corpus may qualify when restoration occurs within the prescribed five-year period.

The framework prevents double recognition. An organisation cannot claim the benefit when borrowed or corpus money is spent and claim it again when regular income repays or restores that amount.

Excess spending also does not become an automatic carry-forward application. Section 341 excludes a set-off or deduction for excess application from preceding years and disallows depreciation when the asset’s acquisition cost has already been claimed as application.

The 85% test limits inter-charity recognition

An RNPO generally must apply or validly accumulate at least 85% of its regular income to avoid taxable regular income. Section 336 treats taxable regular income as nil when that threshold is met.

The remaining 15% may ordinarily be retained without a purpose-specific accumulation statement. When recognised application falls below the threshold, the shortfall becomes taxable regular income.

A non-corpus donation from one RNPO to another receives recognition for only 85% of the payment. A ₹10 lakh transfer therefore produces recognised application of ₹8.5 lakh for the donor organisation. A corpus donation to another RNPO receives no application recognition.

Consider an RNPO with regular income of ₹100 lakh in Tax Year 2026-27. It pays ₹65 lakh for programmes, gives ₹10 lakh to another RNPO and properly accumulates ₹10 lakh for a community health centre.

The organisation does not need to spend the full ₹100 lakh immediately. In this example, however, the recognised total remains ₹1.5 lakh below the statutory threshold.

Forms 108 and 109 provide limited timing options

Section 341 permits an organisation to elect deemed application when it could not apply 85% because income was not received during the year or for another permitted reason. The election uses Form 108, filed electronically on or before the return-filing due date for the relevant tax year.

Where the shortfall resulted from non-receipt, the amount generally must be used during the year of receipt or the immediately following tax year. Other shortfalls generally must be applied in the immediately succeeding tax year.

Deemed application is a timing concession, not a permanent exemption. Failure to use the amount within the permitted period can turn it into specified income.

Section 342 permits accumulation of regular income for a stated project for up to five years. An RNPO must identify the purpose, specify the accumulation period, file the prescribed statement by the return due date and keep the funds in permitted investment or deposit modes.

The required statement is Form 109. Using the money for another purpose, transferring it to another RNPO, investing it in a prohibited mode or missing the authorised period can trigger specified-income taxation.

Citizenship determines whether FCRA rules apply

Income-tax registration addresses the organisation’s tax position. Section 354 addresses a donor’s potential deduction. The Foreign Contribution Regulation Act addresses whether and how the organisation can accept money from a foreign source.

For foreign-contribution purposes, citizenship is more important than the bank’s location or the currency of the transfer. The Ministry of Home Affairs states that money sent by an Indian citizen living abroad from personal savings through normal banking channels is not treated as foreign contribution. Organisations are advised to retain passport details showing that the donor remains an Indian citizen.

A person of Indian origin who has acquired foreign citizenship, including an OCI cardholder, is treated differently. That contribution is treated as foreign contribution.

An NRI with an Indian passport therefore does not occupy the same position as an OCI holding a foreign passport. Sending money in Indian rupees does not automatically remove the foreign-contribution issue. Income-tax approval also does not replace FCRA registration or prior permission.

The recipient should verify citizenship and retain supporting documents before classifying the payment.

Donors and RNPOs need a document trail

Before contributing, a donor should obtain the organisation’s legal name and PAN, Section 332 registration details, Section 354 approval if an Indian deduction is expected, and the correct bank-account details.

The donor should also request FCRA registration or prior-permission details when the contribution comes from a foreign source. The organisation should confirm whether the payment is general or corpus, describe the intended project in writing and issue the prescribed donation receipt or certificate.

A donor seeking corpus treatment should provide an express written direction. Calling a payment a “building donation” informally may not establish that it is corpus.

At year-end, the RNPO should reconcile regular income, corpus and deemed-corpus receipts, foreign contributions, specified-income items, actual charitable payments, loan-funded and corpus-funded expenditure, eligible repayments and corpus restoration.

It should also review inter-RNPO donations, accumulated income, permitted investments, related-person transactions, TDS, cash-payment compliance, Forms 108 and 109, registration validity, approval validity and donor statements and certificates.

The calculation should follow statutory categories rather than simply copying the surplus or deficit in the income-and-expenditure account. A complete record should connect each receipt to its bank account, eventual use and supporting form.

The framework applies from Tax Year 2026-27, making the first year-end reconciliation under the new structure a compliance deadline for organisations that want to preserve their exemption claims.

This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.