Analysis of Charitable Purpose under Income Tax Bill, 2025

Serving the cause of the society is not the sole responsibility of the Government but people of the country are equally responsible for the social welfare & upliftment of deprived section of society. Non-Profit Organizations also known as NGOs play a pivotal role in this task by working towards various charitable activities to attain the above objects. Income Tax law acknowledges the role of NGOs and therefore allow them exemptions from taxation to the NGOs working towards charitable purposes. Therefore, it becomes important to understand the meaning of “Charitable Purpose” and to find out the activities which are eligible for exemption under Income Tax as a charitable activity.

Meaning of Charitable Purpose

Clause (23) of Section 2 of Income Tax Bill, 2025 gives definition as below.

“Charitable Purpose” includes:

(a) Relief of the Poor

(b)Education

(c) Yoga

(d) Medical Relief

(e) Preservation of environment (including watersheds, forests and wildlife)

(f) Preservation of monuments or places or objects of artistic or historic interest

(g) The advancement of any other object of general public utility

The definition of “Charitable Purpose” is almost similar to that in the existing Income Tax Act, 1961. Only exception is that a proviso has been deleted from the definition and is placed at some other appropriate place in the new proposed Income Tax Bill, 2025.

The present Income Tax Act, 1961 has a proviso in respect of “the advancement of any other object of general public utility” as below:

“Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless—

- such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

- the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;”

The purpose of this proviso was to ensure that the NGOs don’t carry out business activity in the veil of charitable activities. Therefore, a proviso was inserted in the Income Tax Act, 1961 that if the charitable trust works towards advancement of any object of general public utility, and also it carries out any trade or commerce or business for any consideration irrespective of the way or nature by which such considerations or fees are applied for charitable purposes, then it should be ensured by the NGO that receipts from such activity is not more than 20% of the total receipts of the NGO. Otherwise, such activities will not fall under “Charitable Purposes”.

As already discussed above, this proviso does not find place in the definition of “Charitable Purpose” in the Income Tax Bill, 2025. But it is not the case that this proviso is entirely ignored in the proposed Bill. Instead of proviso, a new section 346 has been given in the Income Tax Bill, 2025 having the same essence.

Section 346 of Income Tax Bill, 2025

“No registered non-profit organization, carrying out advancement of any other object of general utility, shall carry out any commercial activity unless, -

(a) Such commercial activity is undertaken in the course of actual carrying out of advancement of any object of the general utility;

(b) The aggregate receipts from such commercial activity or activities do not exceed 20% of the total receipts of such registered non-profit organization of the relevant tax year; and

(c) Separate books of account are maintained by such registered non-profit organization for such activities;

This means that there is no change in the definition of “Charitable Purpose” in the Income Tax Bill, 2025 in comparison to Income Tax Act, 1961. Thus, the essence of the law and judicial precedents shall prevail in the new law as well.

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