A Door, Not a Shelter: Rule 189A and the Merger of Registered Non-Profits

For seven months, section 354A of the Income-tax Act, 2025 promised registered non-profit organisations a way to merge without exit tax, on conditions that had not yet been written. On 30 October 2026 the Central Board of Direct Taxes wrote them. Rule 189A and Form No. 112A, inserted in the Income-tax Rules, 2026, now set out twelve conditions that a merger must meet.¹ Our view is that the Rule is overdue and welcome, but it is not a safe harbour. It suits NPOs in the same registration category, with clean demand records and settled objects, and it keeps the merged NPO under obligation for at least five years.

This TLC Insight explains where the Rule fits in the exit-tax scheme, reads each condition with a view to planning, sets out what Form No. 112A requires, and identifies the questions the Rule leaves open.

01The gap section 354A closes

Section 352 is the exit-tax provision for NPOs under the 2025 Act. A specified person pays additional income-tax on its accreted income, at the maximum marginal rate, in the cases listed in the Table in section 352(4). Accreted income is the aggregate fair market value of total assets less total liability, as on the specified date, reduced by the amount attributable to specified assets.²

Serial No. 8 of the Table deals with mergers, and fixes both the specified date and the due date at the date of merger. As substituted by the Finance Act, 2026 with effect from 1 April 2026, it covers a merger with any entity other than a registered NPO; with a registered NPO having the same or similar objects, where the merger does not fulfil the prescribed conditions; or with a registered NPO that does not have the same or similar objects.³

The amendment responded to a gap. The Memorandum to the Finance Bill, 2026 recorded that the 2025 Act, as enacted, did not capture a merger between two registered NPOs with the same or similar objects, a case that section 12AC of the 1961 Act had addressed.⁴ Section 12AC had itself been in force only from 1 April 2025.⁵ The Finance Act, 2026 therefore inserted section 354A, under which section 352 shall not apply to a merger of one registered NPO into another if the other has the same or similar objects and the merger fulfils the prescribed conditions.⁶

02What the notification does

The Income-tax (Eighth Amendment) Rules, 2026 were notified by Notification No. 139/2026, published as G.S.R. 961(E) dated 30 October 2026, under section 533 read with sections 352(4) [Table: Sl. No. 8] and 354A. They come into force on the date of their publication in the Official Gazette.¹ The notification inserts Rule 189A after Rule 189, and Form No. 112A in Appendix III after Form No. 112, of the Income-tax Rules, 2026.⁷

Rule 189A(3) names the two parties. The merging NPO is the one that merges into another registered NPO with the same or similar objects; the merged NPO is the one into which it merges.⁸ Almost every obligation in the Rule falls on the merged NPO, which becomes the long-term bearer of the merging NPO’s tax history.

03The twelve conditions, read for planning

Rule 189A(1) lists clauses (a) to (l). Some are satisfied once, on the date of merger; others run for years. Read for planning, they fall into six groups.

Registration parity. An NPO registered under section 332 cannot merge with one provisionally registered under that section, and the reverse is equally barred.⁹ A provisionally registered NPO must first obtain regular registration. The Rule does not allow a merger to serve as a route to upgrade a provisional registration.

A clean demand position. No tax, interest, penalty, fine or other sum may be payable under an order passed under the Act in respect of the merging NPO, unless that demand is in appeal before an appellate authority. Where an appeal is pending, the merged NPO pays the demand when the appeal attains finality.¹⁰ In practice, undisputed arrears must be cleared before the date of merger.

A five-year object lock. The objects of the merged NPO cannot be amended for five years from the end of the financial year in which the merger takes place.¹¹ The bar is on any amendment, not only one that takes the objects outside charitable purposes. Any change to the objects clause should be made before the merger.

No benefit to related persons. The merger must not result in any direct or indirect benefit to a related person, of either NPO, as referred to in section 337(1) [Table: Sl. No. 2].¹² “Related person” is defined in section 355(h). It includes the author or founder, a person whose contribution exceeds ₹1,00,000 in the relevant tax year or ₹10 lakh in aggregate, and trustees, relatives and concerns in which they hold a substantial interest.¹³ Form No. 112A adds that contributions to the merging NPO count towards total contribution to the merged NPO for section 355(h)(ii), so a donor may become a related person of the merged NPO by aggregation alone.¹⁴

Full succession. All assets and liabilities of the merging NPO vest in the merged NPO from the date of merger. Every obligation passes with them: application of income under section 341, application of accumulated income under section 342, tax on specified income under section 334, the conditions for deemed corpus donations in section 340, investment only in the modes specified in section 350, and payment of additional income-tax under section 352 whenever that liability arises.¹⁵ Proceedings follow the assets. Any assessment, reassessment or other proceeding made or initiated on the merging NPO is deemed made or initiated on the merged NPO, and proceedings for the tax year of merger up to the date of merger, and for earlier years, are made on the merged NPO.¹⁶

A cut-off audit. Both NPOs must get their books audited by an accountant defined in section 515(3)(b), as on the date of merger.¹⁷

04Form No. 112A

The merged NPO must intimate the merger to the jurisdictional Principal Commissioner or Commissioner in Form No. 112A, within one month from the end of the month in which the merger comes into effect. The form is filed electronically, under digital signature or electronic verification code.¹⁸ A merger effective on 10 December 2026, for example, must be intimated by 31 January 2027.

Part A and Part B carry the identity particulars of the merging and merged NPOs, and Part A records the date of merger. The declaration confirms the date of the resolution of the trustees, governing body or management, and records nine undertakings. Most restate the Rule. Two go further: the merged NPO will not claim depreciation on an asset whose cost the merging NPO has already claimed as application of income, and contributions to the merging NPO count towards total contribution to the merged NPO under section 355(h)(ii). The undertaking on section 340 extends even to the merging NPO.¹⁴

Source: Form No. 112A, Note 3.¹⁹

05The price of a missed condition

A merger that fails any condition falls within Serial No. 8(b), and section 354A no longer protects it. The consequences follow from section 352 itself.²⁰

An illustration. Suppose a merging NPO holds assets worth ₹10 crore and owes ₹1 crore on the date of merger, and ₹2 crore of its assets are specified assets. Its accreted income is ₹7 crore. At an illustrative rate of 40%, the tax would be ₹2.8 crore; paid two months and five days after the 14-day window closes, it would carry interest for three months, or ₹8.4 lakh. The actual maximum marginal rate, with surcharge and cess, must be computed for the NPO’s status in the relevant year.

Section 354A is a door, not a shelter. It opens only for a merger that meets every condition, and the merged NPO stays answerable for years after it walks through.

06Questions the Rule leaves open

The points below are our reading of the text as notified. None has yet been tested before an authority.

What is the date of merger? Neither the Act nor the Rule defines it, yet it fixes the audit date, the Form No. 112A deadline and, on failure, both the valuation date and the due date for exit tax. For trusts and societies, merger mechanics turn on the governing instrument and the applicable state law. The date should be fixed expressly in the resolution and the merger instrument.

Breaches after the merger. The object lock and the succession obligations operate for years, but Serial No. 8 fixes the specified date and the due date at the date of merger. The Rule does not say how a later breach, such as an amendment of objects in year three, is to be treated. Read literally, the merger would then fail to fulfil the conditions, with valuation as on the date of merger and interest running from 14 days after it. A clarification from the Board would help.

Demands “in appeal”. Clause (c) excepts only a demand that is in appeal before an appellate authority. Its application to a demand whose appeal period has not expired, or where rectification rather than appeal is pending, is not addressed.

The merging NPO’s registration. The Rule is silent on surrender or cancellation of the merging NPO’s registration after vesting. Because section 352 treats cancellation of registration as a separate trigger, any surrender must be sequenced with care.²¹

Other laws. The Rule addresses only income-tax. Approvals under trust or society law, and the treatment of any foreign contribution, need separate examination.

07A route, not a safe harbour

Rule 189A gives registered NPOs, for the first time under the 2025 Act, a defined route to consolidate without exit tax. The route is conditional at every step, and its conditions keep binding the merged NPO long after the merger. Because the cost of failure is tax at the maximum marginal rate on the merging NPO’s accreted income, with trustees personally exposed, a merger should be planned as a compliance project led by its date, not as a board resolution followed by paperwork.

This insight reflects the law as at 3 November 2026.

About the authorSumit KumarFounder, The Lord’s Consultancy · Corporate, Taxation & Regulatory Lawyer

Advises on direct tax, indirect tax and corporate law, and appears before Appellate Tribunals, the High Courts and the Supreme Court.