TaxSaral
Section 352Charitable Trusts & NPOswas Sections 12AC, 115TD, 115TE, 115TF in IT Act 1961

Exit Tax on Accreted Income — NPO Dissolution or Conversion

When a registered NPO converts to a non-charitable entity, merges with a non-NPO, or has its registration cancelled, a 30% 'exit tax' is levied on its 'accreted income' — the excess of FMV of all assets over total liabilities on the date of conversion or cancellation. This prevents charities from accumulating tax-free assets and then converting to commercial entities.

Who this applies to

Registered NPOs whose registration is cancelled, who convert to a non-charitable entity, or who merge with a non-NPO body.

Key Points

  • Exit tax = 30% of (FMV of all assets − Total liabilities) on the date of conversion/cancellation
  • Triggered by: registration cancellation, voluntary winding up, conversion to company/firm, merger with non-NPO
  • NOT triggered if assets are transferred to ANOTHER registered NPO — this is the escape route
  • Tax must be paid within 14 days of the conversion or cancellation date
  • Failure to pay attracts recovery proceedings and interest from the due date
  • Even trustees can be held personally liable for payment in case of trust default

Worked Example

1

Trust Converting to Private Limited Company

Scenario

Sunrise Education Trust (registered NPO) converts to Sunrise Education Pvt. Ltd. on 1 April 2027. On that date: FMV of assets = ₹8 crore, liabilities = ₹1.5 crore.

Calculation

Date of conversion:                    1 April 2027

FMV of all assets:                     ₹8,00,00,000
Less: Total liabilities:               ₹1,50,00,000
Accreted income:                       ₹6,50,00,000

Exit tax @ 30%:                        ₹1,95,00,000
Add: 4% cess:                          ₹    7,80,000
Total exit tax payable:                ₹2,02,80,000
Due date:                              15 April 2027

Alternative — Transfer to another NPO:
  Exit tax:                            ₹           0

Result

Converting to a company triggers ₹2.03 crore in exit tax. The trust should instead merge with another charitable education trust — this avoids exit tax entirely and preserves assets for charitable purposes.

Related Sections

Section 333Switching Regimes for Charitable Organisations
Section 351Specified Violations — When NPO Registration is Cancelled
Section 332Registration of Charitable Trusts and NPOs
Section 339Corpus Donations — Permanent Fund Contributions

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Section references are based on the Income Tax Act 2025 (Tax Year 2026-27). Examples are illustrative — verify with a Chartered Accountant before filing.