Tax Implications When a Charitable Institution Ceases to Exist or Converts to Non-Charitable Status (Chapter XII-EB: Sections 115TB to 115TF0

Introduced by the Finance Act, 2023, these provisions impose a “Ceasing Tax” on charitable/religious trusts that:

1. Dissolve/terminate operations, or
2. Convert into a non-charitable entity(e.g., private trust, company).

1. Key Provisions

(A)  Section 115TB: Charge of Tax

• Tax Rate: 30%(plus surcharge & cess) on the “net accumulated income”
• Applicable to:
  • Trusts registered under Sections 12A, 12AA, 12AB
  • Institutions approved under Section 10(23C)

(B)  Section 115TC: Computation of “Net Accumulated Income”

math

\text{Net Accumulated Income} = \text{Total Assets} – \text{Total Liabilities} – \text{Capital Contributions}

• Excludes:
  • Assets transferred to another eligible charitable trust
  • Liabilities directly related to charitable activities

(C)  Section 115TD: Tax on Conversion/Dissolution

• Triggering Events:
  • Voluntary dissolution
  • Merger with a non-charitable entity
  • Change in objectives (no longer charitable)
• Tax Liability: Due within 14 daysof dissolution/conversion

(D)  Section 115TE: Exemptions

No tax if:

✅ Assets transferred to another registered charitable trust

✅ Conversion is due to court/government order

(E)  Section 115TF: Procedural Compliance

• Filing Requirement: Form 9A(to be filed before dissolution)
• Penalty: 100% of tax duefor non-compliance

2. Practical Implications

Example:

A trust with ₹5 crore net assets dissolves:

• If assets go to another NGO: No tax
• If converted to a Pvt. Ltd. Co.: ₹1.5 crore tax(30%)

3. Judicial & Compliance Considerations

• Retrospective Effect: Applies from 1st April 2024(AY 2024-25)
• Audit Requirement: Mandatory if net assets > ₹50 lakh
• CBDT Clarification: Assets include immovable property, investments, cash

4. Planning & Mitigation Strategies

✔ Pre-dissolution audit to compute liabilities accurately

✔ Document asset transfers to another charity via resolution

✔ File Form 9A before dissolution to avoid penalties

Note: These provisions aim to prevent misuse of tax-exempt status for private gain.