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Published on:

June 18, 2025

Alankar Mishra

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Income Tax Bill Explained: What is Accreted Tax and Who Should Worry About It?

If you serve as a trustee, handle the books for a charity, or manage any not-for-profit, there's a hidden tax you probably haven't thought about yet. It's called the accreted tax and the 2025 Income Tax Bill just dragged it back into the headlines.

At first glance, it looks harmless. Once the paperwork is filed, though, it can pile up and push your tax bill into the crores-even for groups that do purely charitable or religious work.

So, what exactly is accreted tax? Why has it resurfaced in 2025? And, most crucial, should you be worried? Let's sort through the details.

What Is Accreted Tax? (The Exit Tax Concept)

Accreted tax is a single exit tax that hits some trusts and other tax-free bodies the moment they stop being exempt or shift their setup in a way that changes how the taxman sees them.

The charge first appeared in the 2016 Budget, tucked away in Section 115TD of the Income Tax Act, and was meant to stop tax-free groups from turning into regular businesses and leaving with untaxed savings.

Let’s simplify:

Suppose a charitable trust accumulated ₹50 crore over 20 years under Section 12AA exemption. If it suddenly merges, shuts down, or deregisters, the government wants to tax the “accreted income”, i.e., the value it built tax-free over the years.

So, what exactly is “Accreted Income”?

According to Section 115TD(2), Accreted Income = Fair Market Value (FMV) of Total Assets - Total Liabilities on the specified date.

This income is then taxed at the maximum marginal rate, which is currently 30% + surcharge + cess, effectively up to ~35.88%.

When Does Accreted Tax Apply? (Trigger Events)

The Income Tax Department triggers accreted tax when:

1. A charitable trust loses its registration under Sections 12AA or 12AB.

2. The trust merges with a non-charitable organisation.

3. The trust fails to apply for re-registration when required.

4. The trust modifies its objectives in violation of tax rules.

5. There’s a conversion of a charitable institution into a for- profit entity.

In 2025, the Income Tax Bill is tightening enforcement, specifically for trusts that delay compliance, misuse Section 10 exemptions, or restructure operations without transparent declaration.

What’s Changed in the 2025 Income Tax Bill?

The 2025 Bill re-emphasises compliance, tracking of exempt assets, and exit event taxation. Here’s how:

1. Re-registration non-compliance: Trusts failing to re-register under Section 12AB will face automatic accretion of tax.

2. Widened scope of exit events: Includes more types of amalgamations and conversions.

3. FMV valuation updates: Fair market valuation rules have been revised to prevent undervaluation.

4. Increased audit scrutiny on the application of income and corpus use.

5. Cross-linking with Section 10 exemptions to check misuse.

These changes ensure no exempt institution escapes taxation if it misuses its status or walks away from the charitable path.

Who Should Be Worried About Accreted Tax?

The law may sound niche, but it affects thousands of Indian organisations. If you’re involved in the following, pay attention:

1. Charitable and religious trusts.

2. Educational institutions and NGOs.

3. Hospitals or medical organisations.

4. Political or research foundations.

5. Universities or cultural funds.

Startups originally registered as not-for-profit but later switched to commercial models.

Let’s Understand with a Quick Example:

ABC Foundation is a registered public charitable trust under Section 12AA.

It owns ₹60 crore worth of assets, liabilities of ₹10 crore → net accreted income = ₹50 crore.

It decides to merge with a private commercial entity.

Result?

1. ₹50 crore will be taxed under Section 115TD.

2. Tax at 35.88% = ₹17.94 crore payable as accreted tax.

Even though ABC Foundation didn’t “earn” this income in the traditional sense, the law assumes it gained a tax benefit while accumulating those assets, and now that benefit must be reversed.

Why Was Accreted Tax Introduced in the First Place?

Before 2016, many charitable institutions were accused of:

1. Misusing tax exemptions.

2. Holding massive property portfolios.

3. Later, they are converted into commercial firms or misappropriated.

This led to massive revenue leakage for the government, with no means to collect corporate tax on capital accumulation. Section 115TD and the accreted tax concept were the government’s answer — “no free exit.”

What Can Trusts and Institutions Do to Avoid This Tax?

1. Maintain up-to-date registrations under Section 12AB and 80G.

2. Avoid non-charitable mergers or takeovers.

3. Ensure that any modification of objectives is pre-approved.

4. Don’t let registrations lapse or go unrenewed.

5. Take proper valuation support while dissolving or restructuring.

6. Plan your exit or conversion with tax advisors well in advance.

Penalty for Non-Payment or Delay

Accreted tax is treated like income tax dues. Non-payment can trigger:

1. Penalty under Section 271FA.

2. Interest under Section 220.

3. Prosecution under Section 276CC in severe cases.

Conclusion

Accreted tax is not just a clause, it's a tax weapon designed to ensure accountability and fairness in India’s tax-exempt ecosystem. If your institution has built up wealth under exemption laws, the government now expects a clean, compliant, and declared exit, or you’ll pay heavily for it.

In 2025, with tighter enforcement, ignorance is not an option. Whether you're running a 50-year-old trust or a new-age philanthropic startup, now is the time to check your registrations, compliance timelines, and merger plans.

FAQs

1. What is accreted tax under the Income Tax Act?

Accreted tax is basically an exit tax that hits charitable trusts or groups the moment they stop being tax-exempt. The charge is worked out on the trust's net asset value- how much their assets are worth at fair market value after you take off what they still owe. By slapping this fee on, the government makes sure the trust pays tax on gains it sheltered under Sections 11, 12 or 10(23C) instead of strolling away clean.

2. Which law governs accreted tax in India?

The Income Tax Act, 1961, and the Finance Act, 2016, began to apply accreted tax under section 115TD. Sections 115TE and 115TF discuss how to value assets, calculate the tax owed, and when you must pay it.

3. When is the accreted tax applicable?

Accreted tax becomes applicable in the following cases:

1. Deregistration or cancellation under Section 12AA/12AB.

2. Merger with a non-charitable entity.

3. Failure to re-register under the new rules.

4. Voluntary conversion into a for-profit organisation.

5. Modification of objects without prior approval.

4. How is accreted income calculated?

Accreted income is calculated using this formula:

Accreted Income = Fair Market Value (FMV) of Assets – Total Liabilities

This income is then taxed at the maximum marginal rate, currently around 35.88%, including surcharge and cess.

5. What is the maximum marginal rate applicable to accreted tax?

The maximum marginal rate is the top income tax bracket you hit- usually around 30% - then you add the extra surcharge and cess. That small extra charge can push your overall tax bill to just under 35.88%.

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