Merger of Registered Non-Profit Organisations: Section 354A and Accreted Income Tax (Income Tax Act 2025)
Under the Income Tax Act 2025, a registered non-profit organisation (a trust, society or section 8 company holding valid registration) can merge with another registered non-profit without paying tax on accreted income under section 352, but only if two things are true. The other organisation must have the same or similar objects, and the merger must meet the conditions that the Rules prescribe (section 354A). If either test fails, section 352(4), Table Sl. No. 8 charges additional tax at the maximum marginal rate on the net assets, due from the date of merger.
Section 354A is new. It was inserted by the Finance Act 2026 with effect from 1 April 2026, together with a rewritten Sl. No. 8 in the section 352 Table. This guide explains who the rule covers, what the three merger outcomes are, how accreted income is computed, and what to document before a merger. The law is as amended by the Finance Act 2026 (tax year 2026-27 onwards).
What does section 354A say about a merger of non-profit organisations?
Section 354A is a single short provision. Where a registered non-profit organisation merges with any other registered non-profit organisation, section 352 does not apply if:
- (a) the other registered non-profit organisation has the same or similar objects; and
- (b) the merger fulfils such conditions as may be prescribed.
A "registered non-profit organisation" is any person with a valid registration under a specified provision, where that registration has not been cancelled (section 355(g)). The "specified provisions" are listed in section 355(m): section 12A, 12AA, 12AB or 10(23C) of the 1961 Act, and section 332 of the new Act.
What happens under each merger scenario?
Section 352(4), Table Sl. No. 8 splits mergers into three cases. In every case the "specified date" and the "due date" column both read "the date of merger".
| Who the organisation merges with | Same or similar objects? | Prescribed conditions met? | Accreted income tax? |
|---|---|---|---|
| An entity that is not a registered non-profit (Sl. No. 8(a)) | Not relevant | Not relevant | Yes |
| A registered non-profit (Sl. No. 8(b)) | Yes | No | Yes |
| A registered non-profit (Sl. No. 8(c)) | No | Not relevant | Yes |
| A registered non-profit (section 354A) | Yes | Yes | No, section 352 does not apply |
What are the "prescribed conditions" for a merger?
Section 354A and Sl. No. 8(b) both say the merger must fulfil "such conditions as may be prescribed". The Income-tax Rules, 2026 text available for this article does not contain a rule setting those conditions, and no rule cites section 354A. So the conditions cannot be stated here. Until you have confirmed them from the Rules or a notification, treat the second test as open. Do not assume a merger is protected only because the objects match.
What is accreted income and how is it computed?
Accreted income is the net worth of the organisation, measured at a fixed date. Section 352(2) gives the formula A = B − C, where:
- B is the aggregate fair market value of the total assets on the specified date (for a merger, the date of merger), computed by the prescribed valuation method;
- C is the total liability on that date, computed by the prescribed method.
Section 352(3) then reduces the result by the accreted income attributable to specified assets and the liabilities related to them. The tax is charged at the maximum marginal rate (section 352(1)), on top of the organisation's other income-tax.
Rule 189 sets the valuation. Highlights:
- Assets start from the balance sheet drawn up on the specified date and audited by an accountant, less tax paid and any item shown as an asset that is not really one, such as unamortised deferred expenditure (rule 189(1), (4)(b)).
- Quoted shares are valued at the average of the lowest and highest quoted price on the specified date; if there was no trading, on the last earlier trading day (rule 189(2)(I)(a)).
- Immovable property is valued at the higher of the open-market price from a registered valuer and the stamp duty value (rule 189(2)(II)).
- Liabilities are book liabilities, excluding capital fund or corpus, reserves and surplus, contingent liabilities and general provisions (rule 189(3)).
Worked example 1: computing accreted income on a failed merger
Assumptions: Shree Seva Trust (registered) merges on 15 August 2026 (tax year 2026-27) with a company that is not a registered non-profit, so Sl. No. 8(a) applies. The audited balance sheet as of that date, after the rule 189 adjustments, is as below. All figures are illustrative.
| Step | Item | Amount (Rs) |
|---|---|---|
| 1 | Quoted securities at average of lowest and highest price | 40,00,000 |
| 2 | Building, higher of valuer price (1,20,00,000) and stamp duty value (1,05,00,000) | 1,20,00,000 |
| 3 | Other assets after adjustments | 15,00,000 |
| 4 | B = 40,00,000 + 1,20,00,000 + 15,00,000 | 1,75,00,000 |
| 5 | C = ascertained liabilities only | 25,00,000 |
| 6 | A = B − C = 1,75,00,000 − 25,00,000 | 1,50,00,000 |
| 7 | Less: accreted income attributable to specified assets (assumed) | 30,00,000 |
| 8 | Accreted income charged = 1,50,00,000 − 30,00,000 | 1,20,00,000 |
Tax is the maximum marginal rate multiplied by Rs 1,20,00,000. That rate is not in the source files, so it is left out here. Under section 352(4) the payment is due within 14 days from the due date in column D, and for Sl. No. 8 that due date is the date of merger.
Worked example 2: interest if the tax is paid late
Section 352(6) charges simple interest of 1% of (T × P), where T is the tax on accreted income and P is the number of months, counting part of a month as a month, from the day after the last date for payment to the date of actual payment.
Assume, for illustration, that the tax T comes to Rs 40,00,000 and is paid 2 months and 10 days after the last date. P is counted as 3 months.
- I = 1% × (T × P)
- I = 1% × (40,00,000 × 3)
- I = 1% × 1,20,00,000 = Rs 1,20,000
The tax paid under section 352 is final. Section 352(5) says no credit or deduction is allowed for it elsewhere in the Act.
Real-life example 1: two schools with the same objective
Meena runs a registered trust that operates a small school for girls. A neighbouring registered society, run by Ravi, has the same educational aim and is short of funds. The two agree to combine. Both hold valid registration and both state education as their object, so the first test of section 354A (same or similar objects) is met. Before signing, Meena's chartered accountant checks that the merger meets the prescribed conditions and keeps the proof on file. If it does, section 352 does not apply and no accreted income tax arises on the merger date.
Real-life example 2: a trust merging into a private company
Kavita's family trust holds a registered hospital. The family decides to fold the hospital into a private limited company they own. The company is not a registered non-profit, so the case falls under Sl. No. 8(a), and section 354A cannot help. On the date of merger, accreted income is computed on the trust's net assets and tax at the maximum marginal rate is payable within 14 days of that date.
What should a registered non-profit do before a merger?
- Confirm that the other organisation holds valid registration that has not been cancelled (section 355(g)).
- Compare objects clauses side by side and note why they are the same or similar.
- Find the prescribed conditions in the Rules or notifications in force on the merger date.
- Have the balance sheet audited as of the merger date and keep the rule 189 valuation workings ready, in case section 352 is later argued to apply.
- Keep the tax payment date in mind: 14 days from the date of merger, if tax is payable.
Quick reference
| Point | Provision | Detail |
|---|---|---|
| Exemption from section 352 | Section 354A | Same or similar objects and prescribed conditions met |
| Merger with non-registered entity | Section 352(4), Sl. No. 8(a) | Tax on accreted income |
| Same objects, conditions not met | Sl. No. 8(b) | Tax on accreted income |
| Different objects | Sl. No. 8(c) | Tax on accreted income |
| Specified date and due date | Section 352(4) | Date of merger; pay within 14 days of the due date |
| Rate | Section 352(1) | Maximum marginal rate |
| Late payment interest | Section 352(6) | 1% of (T × P), P in months |
| Valuation | Rule 189 | Audited balance sheet, valuer reports |
What are the common mistakes in non-profit mergers?
- Relying on matching objects alone. Section 354A needs the prescribed conditions as well.
- Merging into a non-registered entity. Sl. No. 8(a) applies whatever the objects are.
- Ignoring cancelled registration. An organisation whose registration has been cancelled is not a registered non-profit under section 355(g).
- Skipping the merger-date balance sheet. Rule 189 works from an audited balance sheet drawn up on the specified date.
- Missing the 14-day window. Interest runs at 1% a month on the tax from the day after the last date, and a part month counts as a full month.
- Assuming the old Sl. No. 8 wording still applies. It was substituted from 1 April 2026 and now has three sub-cases.
Where is this in the Act?
- Section 354A: merger of registered non-profit organisation in certain cases
- Section 352(1) to (8): tax on accreted income; Table Sl. No. 8 for mergers
- Section 355(g), (l), (m): registered non-profit organisation, specified person, specified provision
- Rule 189: valuation of assets and liabilities for accreted income
For the other eight triggers of accreted income tax, read our guide to specified violations and tax on accreted income. For how a registered non-profit is taxed day to day, see taxation of a registered non-profit organisation.
How can CA firms keep track of trust clients through a merger?
A merger touches registration, audit, valuation and a 14-day payment window, usually across several people. Finexo's practice management software for CAs lets you keep a task list and deadlines for each trust client in one place. It does not compute accreted income or advise on a merger.
This article explains the Income Tax Act 2025 as amended by the Finance Act 2026 and the Income-tax Rules, 2026. It is general information, not tax advice. Confirm the position for a specific merger with a qualified chartered accountant.
Frequently Asked Questions
What is section 354A of the Income Tax Act 2025?
It says that when a registered non-profit organisation merges with another registered non-profit, section 352 (tax on accreted income) does not apply, provided the other organisation has the same or similar objects and the merger meets the prescribed conditions.
When is accreted income tax charged on a non-profit merger?
Under section 352(4), Table Sl. No. 8, it is charged where the merger is with an entity that is not a registered non-profit, with a registered non-profit that has different objects, or with one that has the same or similar objects but the merger fails the prescribed conditions.
What is the due date for tax on accreted income after a merger?
The due date in the Table for Sl. No. 8 is the date of merger, and section 352(4) requires payment within fourteen days from that due date.
How is accreted income calculated?
A = B minus C, where B is the fair market value of total assets and C is total liabilities on the date of merger (section 352(2)). The result is reduced for specified assets and related liabilities under section 352(3), and valued as per rule 189.
What interest applies if accreted income tax is paid late?
Simple interest of 1% of (T x P) under section 352(6), where T is the tax and P is the number of months, part months included, from the day after the last date to the date of payment.
Are the conditions for a tax-free merger notified?
Section 354A refers to prescribed conditions, but the Income-tax Rules, 2026 text used for this article contains no rule that sets them. Confirm from the latest Rules or notifications before relying on the exemption.