TRUST/ SOCIETY CONVERTED TO NON-CHARITABLE UNDER INCOME TAX

FREQUENTLY ASKED QUESTIONS (FAQ)

BACKGROUND: A large number of Specified Persons including Trusts, Societies or institutions registered u/s 12AA/ 12AB and 10(23C) of the Income Tax Act, 1961 having previous registration approval till 31-03-2026, were required to get their Registration under the said sections to be renewed. The application for renewal was required to be filed at least 6 months prior to the end of their registration i.e. on or before 30-09-2025. In several cases, such Specified Persons have either not filed the Renewal Application before the due date or their renewal applications have been rejected by the Income Tax Department. In Rajasthan, a large number of cases have been rejected due to Non-Registration of the Specified Person under the Rajasthan Public Trust Act, 1959. In all these cases the “EXIT TAX” provisions as defined in Section 115TD of Income Tax Act, 1961 have been triggered. In this paper, based on our understanding we are answering key Frequently Asked Questions (FAQs) related to such cases and their implication under the Income Tax Act, 1961, for our clients:-

[NOTE – It is understood that this issue is new and subject to massive fallout for even some genuine Charitable Organizations. We expect the CBDT to issue some clarification, circular or notification to avoid genuine hardship to such Charitable Organizations.]

FAQ 1	Who is a Specified Person on which these provisions apply?
Reply	Explanation (iia) of Section 115TD defines a specified person as below:-   “Specified Person” means – (a) Any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or (b) a trust or institution registered under section 12AA or section 12AB;
FAQ 2	When will the provisions of ‘Exit Tax’ u/s 115TD apply?
Reply	As per Section 115TD(1), the ‘Exit Tax’ provisions are applicable where in any previous year, a specified person has— (a) converted into any form which is not eligible for grant of registration u/s 12AA or 12AB or 10(23C); (b) merged with any entity other than an entity which is a trust or institution having objects similar to it and registered u/s 12AA or 12AB or 10(23C); or (c) failed to transfer upon dissolution all its assets to any other specified person within a period of twelve months from the end of the month in which the dissolution takes place;
FAQ 3	What will be ‘Liability’ on Specified Person, if Exit Tax provisions u/s 115TD is triggered?
Reply	As per section 115TD(1) where the Exit Tax provisions u/s 115TD are triggered then, in addition to the income-tax chargeable in respect of the total income of such specified person, the accreted income of the specified person as on the specified date shall be charged to tax and such specified person shall be liable to pay additional income-tax (herein referred to as tax on accreted income) at the maximum marginal rate on the accreted income.
FAQ 4	What is Accreted Income?
Reply	As per section 115TD(2), ‘Accreted Income’ means the amount by which the aggregate Fair Market Value (FMV) of the total assets of the specified person, as on the specified date, exceeds the total liability of such specified person, computed in accordance with the method of valuation, as prescribed under Rule 17CB of the Income tax Rules,1962.   [Accreted Income = Aggregate FMV of Total Assets – Total Liabilities]
FAQ 5	What is the Fair Market Value of the asset?
Reply	The method of calculation of ‘Fair Market Valuation’ of an Assets has been provided under Rule 17CB the details of which are given below in Annexure A.
FAQ 6	What is Specified Date?
Reply	As per Explanation (ii) of Section 115TD ‘Specified Date’ means,-   (a) the ‘Date of Conversion’ in a case where the specified persons convert into any form which is not eligible for grant of registration u/s 12AA or 12AB or 10(23C);   (b) the ‘Date of Merger’ in a case where the specified persons merged with any entity other than an entity which is a trust or institution having objects similar to it and registered u/s 12AA or 12AB or 10(23C); and   (c) the ‘Date of Dissolution’ in a case where the specified persons failed to transfer upon dissolution all its assets to any other specified person within a period of twelve months from the end of the month in which the dissolution takes place;
FAQ 7	What is Date of Conversion?
Reply	The ‘Date of Conversion’ as per Explanation (i) of section 115TD are:-   (a) the date of the order cancelling the registration u/s 12AA or 12AB or 10(23C), in a case referred to in clause (i) of sub-section (3); or   (b) the date of adoption or modification of any object, in a case referred to in clause (ii) of sub-section (3); or   (c) the last date for making an application for registration under sub-clause (i) or sub-clause (ii) or sub-clause (iii) of clause (ac) of sub-section (1) of section 12A or for making an application for approval under clause (i) or clause (ii) or clause (iii) of the first proviso to clause (23C) of section 10, as the case may be, in a case referred to in clause (iii) of sub-section (3); [Example: In case of registration valid till 31-03-2026, the last date for making an application is 30-09-2025, which is 6 months prior to end of earlier registration.]
FAQ 8	What is the Maximum Marginal Rate (MMR) for FY 2025-26?
Reply	Maximum Marginal Rate (MMR) for FY 2025-26 u/s 115BAC (New Default Regime):-
	Income Tax (IT)			30% of Income			30%
	Add: Surcharge			25% of IT i.e.30*25%			7.50%
	Add: Health & Education Cess			4% of Tax & Surcharge i.e. (30+7.5)*4%			1.50%
	Total MMR						39%
FAQ 9	What is the Due Date for Payment of Tax on Accreted Income?
Reply	As per Section 115 TD(5) the payment of tax on the Accreted Income under Section 115TD (1) shall be payable by the principal officer or the trustee of the specified person, as follows:-
	Sub-Clause	Event Triggering Tax Payment			Payment Deadline: Within 14 Days From
	(i)(a)	Existing Registration or approval u/s 12AA or 12AB or 10(23C) is cancelled, and no appeal filed			The date when the period to file an appeal under Section 253 expires, and no appeal is filed.   [Example: If order of cancellation is received on 15-03-2026, then the Due Date of Payment of Tax is 14-06-2026]
	(i)(b)	Existing Registration or approval u/s 12AA or 12AB or 10(23C) is cancelled and appeal confirms cancellation			The date the appeal order confirming cancellation is received.   [Example: If order of Appeal is received on 30-09-2026, then the Due Date of Payment of Tax is 14-10-2026]
	(ii)	Trust changes its objects and doesn’t apply for fresh registration/approval			The end of the previous year in which objects are changed.   [Example: If Object is Changed on 15-03-2026, then the Due Date of Payment of Tax is 14-04-2026]
	(iii)(a)	Application for Fresh Registration or Approval u/s 12AA or 12AB or 10(23C)  is rejected and no appeal filed			The date when the period to file an appeal under Section 253 expires, and no appeal is filed   [Example: If order of rejection is received on 15-03-2026, then the Due Date of Payment of Tax is 14-06-2026]
	(iii)(b)	Application for Fresh Registration or Approval u/s 12AA or 12AB or 10(23C)  is rejected and appeal confirms rejection			The date the appeal order confirming cancellation is received   [Example: If order of Appeal is received on 30-09-2026, then the Due Date of Payment of Tax is 14-10-2026]
	(iv)	Trust merges with another  entity not having same objects or not registered u/s 12AA or 12AB or 10(23C)			The date of the merger   [Example: If Merger is done on 31-03-26, then the Due Date of Payment of Tax is 14-04-26]
	(v)	Trust dissolves and doesn’t transfer its assets to any other Specified Person within 12 months from the end of the month in which dissolution takes place			The date when the 12-month period after dissolution expires   [Example: If Trust is dissolved on 01-05-2025, then the Due Date of Payment of Tax is 14-06-2026]
FAQ 10	What is the Rate of Interest in case of non-payment of tax on Accreted Income?
Reply	As per section 115TE, where the principal officer or the trustee of the specified person fails to pay the whole or any part of the tax on the accreted income referred to in sub-section (1) of section 115TD, within the time allowed under sub-section (5) of that section, he or it shall be liable to pay Simple Interest at the rate of 1% (one per cent) for every month or part thereof on the amount of such tax for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.
FAQ 11	What is the “Specified Date” (date of conversion) for ‘Exit Tax’ under Section 115TD if a trust, holding a valid registration until 31st March 2026, applies for renewal within the prescribed time limit (i.e., on or before 30th September 2025), but the application is rejected on 10th March 2026 and registration cancelled vide orders dated 15th March 2026?   What will be the date of Conversion:- a) Due Date for Application i.e. 30-09-2025; or   b) Date of Rejection of Renewal Application i.e. 10-03-2026   c) Date of Cancellation i.e. 15-03-2026;   d) Day after the natural expiry of the previous registration i.e. 01-04-2026?
Reply	For understanding the Specified Date in this case, we are discussing below the legal provisions applicable:- 1. Non-Applicability of the “Failure to Apply” Clause: Since the trust successfully filed its renewal application within the statutory deadline i.e. before 30-09-2025 as per Section 12A(1)(ac)), it does not trigger Section 115TD(3)(iii), which deals with the failure to make an application. Therefore, the conversion date is not pegged back to the last date of application. 2. Trigger Event – Cancellation of Registration: Under the procedures of Section 12AB, when the Principal Commissioner or Commissioner rejects a renewal application they are mandatorily required to pass an Order for Cancellation of the Registration under 12AA/ 12AB/ 10(23C). This specifically triggers Section 115TD(3)(i), which states: “(3) For the purposes of sub-section (1), a specified person shall be deemed to have been converted into any form not eligible for registration under section 12AA or section 12AB or approval under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 in a previous year, if,- (i) the registration or approval granted to it under section 12АА, ог section 12AB, or sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, has been cancelled;” 3. Statutory Definition of the “Date of Conversion”: Once Section 115TD(3)(i) is triggered, the law provides an exact definition of what date must be used. Explanation (i)(a) to Section 115TD explicitly states: “’date of conversion’ means— (a) the date of the order cancelling the registration or approval, in a case referred to in clause (i) of sub-section (3);”   Conclusion: Thus, in this case since the Tax Officer has passed a cancellation order dated 15-03-2026, Explanation (i)(a) of Section 115TD strictly applies. The order prematurely terminates the registration on the exact date it is passed i.e. 15th March 2026, thus superseding its natural validity period of 31st March 2026. Consequently, the trust must compute its Accreted Income based on the Aggregate Fair Market Value of its total assets and liabilities exactly as they stood on 15th March 2026.
FAQ 12	In the FAQ 11 above, in case if the Application for Renewal has been filed after the statutory time limit has expired i.e. after 30th September 2025, and this delayed application is subsequently rejected on 10th March 2026 and existing registration is cancelled via an order dated 15th March 2026.   What will be the date of Conversion:- a) Due Date for Application i.e. 30-09-2025; or   b) Date of Rejection of Renewal Application i.e. 10-03-2026   c) Date of Cancellation i.e. 15-03-2026;   d) Day after the natural expiry of the previous registration i.e. 01-04-2026?
Reply	In this scenario, since the application has not been filed within the stipulated due date, the provisions of Section 115TD(3)(iii) will be immediately triggered. This section explicitly states that a specified person is deemed to have converted into a non-eligible form if:-   “(iii) it fails to make an application in accordance with the provisions of clause (i) or clause (ii) or clause (iii) of the first proviso to clause (23C) of section 10 or sub-clause (i) or sub-clause (ii) or sub-clause (iii) of clause (ac) of sub-section (1) of section 12A, within the period specified in the said clauses or sub-clauses, as the case may be, which expires in the said previous year.”   Statutory Definition of the “Date of Conversion”: Since the trust’s situation falls under the “failure to apply” clause of Section 115TD(3)(iii), the law mandates a specific date of conversion. Explanation 1(i)(c) to Section 115TD defines the “date of conversion” as:   “(c) the last date for making an application for registration under sub-clause (i) or sub-clause (ii) or sub-clause (iii) of clause (ac) of sub-section (1) of section 12A or for making an application for approval under clause (i) or clause (ii) or clause (iii) of the first proviso to clause (23C) of section 10, as the case may be, in a case referred to in clause (iii) of sub-section (3);”   Conclusion: Thus, in this case as per Explanation 1(i)(c) of Section 115TD, the date of conversion shall be the last day on which the application should have been made. Therefore, the trust must compute its Accreted Income based on the Aggregate Fair Market Value of its total assets and liabilities exactly as they stood on 30th September 2025.
FAQ 13	In the FAQ 11 & FAQ 12, what will be Income Tax Return (ITR) Forms applicable for FY 2025-26 and FY 2026-27 onwards?
Reply	The following ITR forms are applicable on the Trust, if its renewal application is rejected and registration is subsequently canceled by the tax officer in FY 2025-26:-
			FY 2025-26 (Rejection Year)			FY 2026-27 Onward (Subsequent Years)
	ITR Form		Form No. ITR – 7			Form No. ITR – 5
	Logical Reasoning		Since, the trust’s application is rejected, it must compute its “Accreted Income” and pay the exit tax at the Maximum Marginal Rate. The specific statutory schedule required to declare this calculation, the fair market value of assets/liabilities, and the details of amount paid for the exit tax via challan is Schedule 115TD, which is exclusively in the ITR-7 form.			In all cases where a Trust/ Society which is not eligible to file Form No. ITR – 7, the Form No. ITR – 5 has been prescribed as per “Instructions for Filling Form No. ITR – 5” issued by the Income Tax Department.   Form No. ITR – 7 is applicable only for persons including companies required to furnish return under sections 139(4A) or 139(4B) or 139(4C) or 139(4D) only.
FAQ 14	In case if the renewal application for Registration of a Trust u/s 12AA or 12AB or 10(23C) has been rejected, then whether the entire Gross Receipts of the Trust will be taxable from the Subsequent Year or only the Net Income (after deducting expenses) is taxable under Income Tax?
Reply	If the renewal Application has been rejected, then the Trust is typically assessed as an Association of Persons (AOP). In this status, normal commercial principles apply for calculating Income. As a prudent standard, only the net income (surplus) of the Trust is generally taxable under the Income Tax Act and not the entire gross receipts. This has also been established by several rulings of ITAT.
FAQ 15	In FAQ 11, What will happen, if the tax officer passes an order to reject the renewal application and states that “In view of the above facts, rescinding proceedings for cancellation of registration u/s 12A(1)(ac)(i) of the IT Act, 1961 will be initiated separately” but no cancellation order has been passed till 31-03-2026.   What should an Assessee do in this case?
Reply	Since no Cancellation Order has been passed for existing registration, the Charitable Status of the Trust will continue till 31-03-2026, but the renewal thereafter has been rejected, therefore w.e.f. 01-04-2026, the trust converts into a form which is not eligible for grant of registration u/s 12AA or 12AB or 10(23C) and thus the Date of Conversion is 01-04-2026.   However, there is a technical difficulty in determining the Due Date of Payment of Tax on Accreted Income, since in Section 115TD(5), the due date prescribed is dependent on the Date of Cancellation Order. We believe that in all such cases the Tax Officer will conduct separate proceedings with an Order, on the basis of which the Due Date for Payment of Tax on Accreted Income will be determined u/s 115TD(5).   The Assessee can act as below:-   1) File their ITR in Form No. ITR 7 as Charitable Trust for the FY 2025-26;   2) From FY 2026-27, treat themselves as Non Charitable and the Total Income will be assessed as an AOP;   3) Tax Accreted Income to be Paid after a Separate Order is passed by the Tax Officer;   4) Return for the FY 2026-27 will be filled in Form No. ITR – 7 with details of Exit Tax in Schedule 115TD;   5) From FY 2027-28, the Trust should be considered as an Association of Person and its Income shall be taxed at MMR and the return to be filled in Form No. ITR – 5.