[Opinion] Income-tax Bill 2025 – Loan Repayment Rules for NPOs

Hitesh Kumar & Deepak Kapoor – [2025] 174 taxmann.com 158 (Article)

The Income-tax Bill 2025 (ITB) is proposed to come into effect from 1stApril 2026. Under this Bill, the expressions such as trust, institution, university, hospital, religious trust are replaced by the unified term “Non-profit Organisation” (NPO).

The ITB consolidates all relevant provisions under a single part divided into seven sub-parts. This article highlights the key tax implications that NPOs must consider when obtaining loans or borrowings.

1. Relevant Provisions – Clauses 341(2)(b) and 341(4)

Clause 341(2)(b) and 341(4) of the ITB deals with the treatment for application of expenses made out of loan or borrowing and the conditions under which loan repayments are considered as an application of income.

2. For Entities Other Than NPOs

1. Expenses incurred from loans or borrowings are allowed on an accrual basis.
2. Borrowing and Repayment of loans are treated as capital transactions and do not affect the Profit & Loss account.

3. For NPOs

1. Expenses incurred from loans or borrowings are not allowed as application of income—neither on an accrual basis nor on a cash basis.
2. Loan repayment is allowed as an application only in the year of repayment, and that too, subject to specific conditions.

As compared to provisions of Explanation 4 (ii) to section 11(1) of Income-tax Act 1961 with Clause 341(2)(b) and 341(4) with ITB pertaining to Loans and borrowings, they are almost similar.

Below is the extract of relevant provisions of ITB:

Clause 341(2)(b):

The amount repaid, during the tax year, towards any loan or borrowing where,

(i) such repayment is within five years from the end of the tax year in which such application of income was made from the loan or borrowing; and

(ii) the application of income from the loan or borrowing is made after the 31 March, 2021 and there was no violation of any provision of this Part, or any corresponding provision of the Income-tax Act, 1961 with respect to such application.”

Clause 341(4):

“An application from corpus, loan or borrowing, accumulated income, specified income or deemed accumulated income shall not be considered as application for the purpose of sub-sections (1) and (2).”

Conditions for allowing loan repayment as application:

1. The loan must be repaid within 5 years from the end of the tax year in which application was made;
2. Application of funds from the loan must have been made on or after 01stApril 2021; and
3. There must be no violation regarding the application of the amount.

Examples of violation

(a) Funds not used for the objects of trust.

(b) Non- compliance with TDS provisions on related expenses.

Illustrative Example

If a loan is obtained in April 2023 and application is made out of loan in June 2024. Loan repayment must be completed by 31 March 2030 (i.e. within five years from the end of tax year 2024-25).

If repayment is made after 31 March 2030, NPOs cannot claim the amount as application—neither in the year of expenditure nor in the year of repayment.

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