Union Budget 2025-26: Major Impacted on NGO Section

Union Budget 2025-26: Major area of points impacted on NGO section

Section 12AB Reforms: Simplification of  :

The Budget 2025 proposal to extend the registration validity period for smaller charitable trusts and institutions u/s 12AB is a welcome relief aimed at simplifying compliance.   …………………….. Change not impacted on National Institute of Public Finance Policy

Current Scenario (Pre-Amendment): Trusts or institutions registered u/s 12AB receive:

• • 5-year registration, or
  • 3-year provisional registration (if activities haven’t commenced).
• Renewal is mandatory every 5 years, which adds to the compliance burden—especially for smaller organizations.

Proposed Amendment (Effective April 1, 2025): For smaller trusts or institutions, the registration period is increased from 5 to 10 years, if: They apply under sub-clause (i) to (v) of Section 12A(1)(ac), and Their total income (before applying Sections 11 and 12 exemptions) does not exceed ₹5 crores in each of the two preceding previous years.

Implications:

Criteria	Pre-Amendment	Post-Amendment (from AY 2025-26)
Standard Registration Period	5 years	10 years (for eligible small trusts)
Threshold for Eligibility	Not applicable	₹5 crore total income limit (gross, without exemptions) in both preceding years
Provisional Registration (no activity)	3 years	Unchanged
Compliance Frequency	Higher	Reduced (fewer renewals needed)

Rationalisation of ‘Specified Persons’ U/s 13 ( Specified Person Redefined (Section 13(3)) ) :

Threshold for “substantial contribution” raised from Rs. 50,000 to Rs. 1 lakh/year or Rs. 10 lakh cumulatively. The contribution threshold raised to ₹1 lakh annually, ₹10 lakh cumulatively.  Moreover the Relatives and related concerns of contributors excluded from the definition.

From 1st April 2025, the definition of substantial contributor (and hence a “specified person” other than founders, trustees, etc.) will be modified as:

Contribution Basis	Old Threshold	New Threshold
In the relevant previous year only	₹50,000 (aggregate)	₹1,00,000 or more
In aggregate up to previous year	₹50,000	₹10,00,000 or more

• Applies only to donors (not trustees, founders, etc.)
• Brings more proportionality and removes overly broad inclusion of minor donors

Objective of this change to Focus restrictions only on major donors with potential influence. This Impact on NGO that Simplifies reporting; reduces compliance for small contributions; ensures independence of trust activities from donor influence.

Trusts will no longer need to track small donors over many years. Focus shifts to significant contributors, which is more meaningful. This Helps differentiate between genuine donors and influential contributors who could derive undue benefits from trust assets. If a trust misuses its income by applying it to benefit a specified person, the relevant income portion still becomes taxable—preserving regulatory integrity.

TDS Thresholds Raised: ₹50,000 for professional fees, ₹6 lakh for rent.

Which Reduced risk of exemption loss due to unintentional donor overlaps.  FCRA Scrutiny Continues: Stricter monitoring by MHA. NGOs must strengthen FCRA compliance, governance, and reporting standards.

Rationalisation of Taxation for Business Trusts (REITs & InVITs)- Long-Term Capital Gains (LTCG) Holding Period Reduced:

The Budget 2025 proposal to amend Section 115UA(2) addresses a crucial oversight in the taxation of business trusts such as REITs and InvITs, by including Section 112A in its scope.

Current Legal Position (Before Amendment) :

Section 115UA(2): Business trusts enjoy a pass-through status for interest, dividend, and rental income received from SPVs—this income is taxed directly in the hands of unit holders. Tax is levied on the total income of a business trust at the maximum marginal rate (MMR), subject to:

Old rule: Holding period for REIT/InvIT units to qualify as long-term was 36 months.

• Section 111A: Taxation of short-term capital gains on listed securities (15% rate).
• Section 112: Taxation of long-term capital gains (LTCG) on assets other than covered u/s 112A (generally 20% with indexation). Section 112A, which deals with LTCG on listed equity shares, equity mutual funds, and units of business trusts exceeding ₹1 lakh (taxed at 10%), was not referenced in 115UA(2). This led to ambiguity or even over-taxation of LTCG income from such units at the MMR, instead of the beneficial rate under 112A.

Proposed Amendment (Effective AY 2026–27)

New rule: Holding period reduced to 12 months, aligning with listed equity shares.

• Section 112A (which governs long-term capital gains or LTCG on listed securities) will now apply to capital gains on the transfer of assets within business trusts. Specifically, LTCG arising from such transactions will now be taxed at 10% (beyond ₹1 lakh), just like other listed equity-oriented securities.
• Section 115UA(2) will be amended to explicitly include Section 112A, alongside 111A and 112. This will extend the benefit of concessional LTCG taxation (10%) under 112A to business trusts and their unit holders, wherever applicable. This means:
• LTCG tax rate of 10% (u/s 112A) now applies after 1 year, not 3. Significantly improves after-tax returns for investors.

Implications and Benefits

Aspect	Before Amendment	After Amendment (from AY 2026–27)
Applicability of Section 112A	Not mentioned in 115UA(2); risk of MMR	Explicitly allowed
Tax Rate on LTCG (units/shares)	Could be taxed at 30%+	Capped at 10% (above ₹1 lakh gains)
Legal Clarity	Ambiguous	Clear inclusion and consistency
Benefit to Investors	Reduced	Enhanced; promotes confidence

Policy Rationale : Aligns with the original intent of the pass-through regime and concessional tax treatment of capital gains in business trusts. Encourages retail and institutional participation in REITs and InvITs, especially given their growing role in India’s infrastructure and real estate development.

Standardizes the taxation of long-term capital gains from business trust assets with gains from other equity-like instruments. Addresses the earlier lack of explicit provision for taxing LTCG from internal asset transfers by business trusts. Investor Confidence will be Enhances predictability and transparency for investors in REITs and InVITs.

Retail and institutional investors may find REITs/InVITs more attractive with simplified tax rules. Internal restructuring of assets in business trusts will now be clearer in terms of tax impact. Brings capital gains taxation of business trusts in line with listed equity shares and mutual funds. This change Aims to make REITs/InVITs more tax-efficient and appealing to investors.

Rationalisation of ‘Specified Violation’ Clause u/s 12AB(4)

• If a trust/institution’s application u/s 12A(1)(ac) is: Incomplete, or Contains false or incorrect information, it is treated as a “specified violation.” Cancellation of registration u/s 12AB(4), even for minor defaults. This also triggers taxation on accreted income under Chapter XII-EB (at 30%). Incomplete applications will no longer be treated as “specified violations” leading to automatic cancellation of registration.
• Proposed Amendment (Effective April 1, 2025): Incomplete applications u/s 12A(1)(ac) will no longer be treated as specified violations u/s 12AB(4). Only deliberate falsification or incorrect information will remain under the ambit of “specified violations.”
• Prevent cancellation due to minor documentation issues. Protects genuine charitable entities from harsh consequences due to minor procedural lapses. Promotes ease of compliance and reduces litigation risk for trusts/institutions. Aligns with the government’s broader goal of simplification and trust-building with the charitable sector. This change is Protects genuine trusts from harsh penalties like taxation on accreted income due to clerical errors; encourages more trusts to apply.
• Extended Registration Period for Smaller Trusts : Change: Registration validity extended from 5 years to 10 years for trusts/institutions with income < Rs. 5 crores in the previous 2 years. This change is Reduce frequency of registration renewals and associated compliance burden.

New Income Tax, TDS, and TCS changes effective from April 1, 2025 Enhanced TDS Thresholds – TDS Amendments (Effective FY 2025-26)

Section	Nature of Payment	New Threshold
194J	Professional Fees	₹50,000 (up from ₹30,000)
194H	Commission/Brokerage	₹20,000 (up from ₹15,000)
194D	Insurance Commission	₹20,000 (up from ₹15,000)
194	Dividends	₹10,000 (up from ₹5,000)
193, 194A	Interest on Securities/Others	₹10,000
194A	Interest (Banks/Post Office)	₹50,000 (Non-Sr. citizens); ₹1,00,000 (Sr. citizens)
194I	Rent	Monthly rent > ₹50,000
194R	Business perks/benefits	10% if > ₹20,000/year
194	Partners’ Interest/Commission/Remuneration	TDS @10% above ₹20,000

• Sections 206AB & 206CCA (higher TDS/TCS for non-filers) now omitted.

TCS Amendments (Effective FY 2025-26)

Nature	Threshold / Rate
Foreign Remittance under LRS	No TCS up to ₹10 lakh (earlier ₹7 lakh)
Foreign Education Loans (Sec 80E)	TCS exempted (was 0.5%)
Overseas Tour Packages	5% up to ₹10 lakh; 20% beyond ₹10 lakh

Equalization Levy Removed:

• The 6% levy on digital ad services to non-residents is removed w.e.f. April 1, 2025. Business Trusts (Section 115UA): Capital gains taxed at preferential rates instead of MMR.

Effective Date: All changes are proposed to apply from 1 April 2025 (i.e., AY 2025-26 onwards).