Everything You Need to Know About Exit Tax for NGOs in India
Non-Governmental Organizations (NGOs) in India enjoy tax exemptions to support their charitable activities.
But what happens when an NGO closes down, merges, or loses its tax-exempt status? That’s where Exit Tax comes into play.
The Exit Tax, introduced under Section 115TD of the Income Tax Act, 1961, came into effect from June 1, 2016 to make sure that NGOs don’t misuse their tax-free status for personal or financial gain.
When Does an NGO Have to Pay Exit Tax?
Exit Tax is applicable in the following situations:
- Conversion Into a Non-Charitable Organization
If an NGO voluntarily converts into a for-profit entity or if the government cancels its registration, it will have to pay exit tax.
- Merger with a Non-Charitable Organization
If an NGO merges with an organization that is not tax-exempt, exit tax is triggered.
- Transfer of Assets to a Non-Charitable Entity
If an NGO donates or transfers its assets (property, funds, etc.) to an organization that is not registered under Sections 12A, 12AA, or 10(23C) of the Income Tax Act, it must pay exit tax.
- Failure to Renew Registration
In 2021, new rules required NGOs to reapply for registration. If an NGO fails to do so, it is treated as a non-charitable entity and becomes liable to pay exit tax.
How is Exit Tax Calculated?
Exit tax is calculated based on the NGO’s accreted income, which is:
Fair Market Value (FMV) of Total Assets – Liabilities
This amount is taxed at maximum marginal rate (MMR), currently 34.94% (including base rate, surcharge, and cess).
Are There Any Exemptions?
Yes. An NGO can avoid exit tax if it transfers its assets to another registered NGO with similar objectives. This makes sure that charitable funds remain within the non-profit sector.
Here are some examples for better understanding:
Example 1: NGO Converts into a For-Profit Entity
NGO A decides to shut down as a charity and convert into a for-profit company. It has assets worth ₹50 crore and liabilities of ₹10 crore.
This means its accreted income is ₹50 crore – ₹10 crore = ₹40 crore.
Exit Tax = 34.94% of ₹40 crore = ₹13.98 crore
Example 2: NGO Merges with Another Registered NGO
NGO B merges with another registered NGO that has tax-exempt status. Since both organizations are compliant, no exit tax is charged.
Conclusion
To stay compliant and avoid unnecessary tax liabilities, NGOs should:
- Maintain valid registration under tax-exempt sections.
- Transfer assets only to registered NGOs.
- Follow all legal requirements for renewal and compliance.
By following these 3 simple rules, NGOs can stay on the right side of the law and continue doing their important work without the stress of dealing with heavy penalties or other serious consequences.