TaxSaral

Section 352 · was Sections 12AC, 115TD, 115TE, 115TF in the 1961 Act

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 it 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

Trust Converting to Private Limited Company

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.

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 registered charitable education trust — under Section 354A (inserted by the Finance Act, 2026) such a merger, with same or similar objects and meeting the prescribed conditions, does not attract the exit tax, and the assets stay devoted to charitable purposes.

Related sections

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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.