Terrorist Organisation Listing 2026: Compliance for Banks & Financial Entities

What Happened?

On September 24, 2026, the Reserve Bank of India (RBI) issued a mandatory circular to all commercial banks, payment banks, non-banking financial companies (NBFCs), and other regulated entities. The circular notifies that Shahzad Bhatti Network (SBN) has been declared as a "Terrorist Organisation" and listed in Schedule I of the Unlawful Activities (Prevention) Act, 1967 (UAPA). This was done through Ministry of Home Affairs notification S.O. Number 5080(E) dated September 16, 2026. All regulated financial entities must immediately comply with prescribed procedures for account screening, freezing, and reporting.

Background & Legal Context

Why Does This Matter in Tax & Compliance?

While this circular appears to be primarily a financial compliance matter under UAPA 1967, it has direct implications for Income Tax compliance under the Income Tax Act 2025 and the corresponding Income Tax Act 1961 provisions:

• Section 194 (TDS) & Section 195 (TCS): Banks are required to deduct TDS on various payments. If an account holder is linked to a designated terrorist organisation, the bank must freeze funds and report to FIU-IND, which automatically triggers non-cooperation with tax authorities.
• Section 271AAB of Income Tax Act 2025: Deals with penalty for failure to furnish information or document required by the Assessing Officer. Regulated entities must maintain proper documentation of all screening and compliance actions.
• Section 69A & 69B (IT Act 1961): These sections deal with unexplained money and unexplained investments. If any taxpayer receives funds from a designated terrorist organisation, such funds cannot form the basis of any income claim and may trigger harsh penalties.
• Section 35 of UAPA 1967: Clause (a) of sub-section (1) allows the Central Government to designate organisations as terrorist organisations. Once designated, the First Schedule lists all such entities.
• RBI KYC Directions 2025: Chapter IX requires all regulated entities to follow Know Your Customer procedures strictly. The updated Directions dated November 28, 2025 (amended September 18, 2026) mandate that banks report matching accounts to FIU-IND within the prescribed timeframe.

Key Obligations for Banks Under This Circular:

• Immediately screen all existing accounts against the SBN list
• Freeze accounts if any match is found
• Report details to FIU-IND (Financial Intelligence Unit - India)
• Advise the Ministry of Home Affairs as per UAPA notification dated February 2, 2021
• Monitor future amendments to Schedule I of UAPA 1967 for real-time compliance

What Does This Mean for You?

For Bank Account Holders & Taxpayers:

If you maintain accounts in any regulated entity (bank, NBFC, payment bank, etc.), be aware that:

• Your account may be frozen: If your name matches or appears similar to any individual or entity associated with SBN or if you receive funds from such entities, your bank account will be immediately frozen without prior notice.
• You cannot access your funds: Once frozen, withdrawal privileges are suspended until the matter is investigated and cleared by authorities.
• Your tax filing may be delayed: If your account is frozen, you cannot make tax payments, TDS deposits, or GST payments, leading to penalties under the Income Tax Act 2025 and GST law.
• Criminal liability attached: Under Section 17 of UAPA 1967, providing funds to a designated terrorist organisation is a criminal offence punishable with imprisonment and fine.

For Businesses & Financial Institutions:

• Enhanced due diligence required: All regulated entities must upgrade their Know Your Customer (KYC) systems to automatically flag names matching the updated UAPA Schedule I list.
• Compliance reporting burden: Banks and NBFCs must maintain detailed records of all screening reports submitted to FIU-IND and MHA for a minimum of 5 years (as per RBI guidelines).
• No grace period: The compliance is effective immediately from the date of this circular (September 24, 2026). There is no transition period.
• Penalty risk for non-compliance: If a regulated entity fails to freeze an account or report a match, it faces penalties under UAPA 1967 and can invite regulatory action from RBI, including suspension of banking license.

Impact on Assessment Year 2026-27:

For AY 2026-27 (FY 2025-26), if any taxpayer or income source is linked to a designated terrorist organisation, the entire income claimed from such sources will be:

• Disallowed under Section 69B of Income Tax Act 1961
• Added to total income without any deduction
• Subject to penalty under Section 271(1)(c) or Section 271AAB of Income Tax Act 2025

What Should You Do Now?

Immediate Action Items:

1. Self-audit your bank accounts: Review all your bank account statements and verify that neither you nor your authorised signatories have any connection to SBN or any other designated terrorist organisation.
2. Check for incoming funds: If you have received any funds from unknown sources in the past 12 months, immediately investigate the source. Do not ignore such transfers as "mistakes."
3. Review your GST vendor list: Under GST law, if any of your registered suppliers or service providers are associated with a terrorist organisation, you must discontinue transactions immediately. Failure to do so may invite GST scrutiny and Input Tax Credit (ITC) denial.
4. Update KYC with banks: Proactively visit your bank branch and confirm that your KYC is complete and accurate. Provide a sworn statement if required confirming no links to any terrorist organisation.
5. Maintain documentary evidence: Keep all bank statements, investment proof, and income source documentation readily available. During any tax audit or investigation, you may need to justify the source of funds under Section 68 of Income Tax Act 1961.
6. Professional guidance essential: If you have received funds from anyone and are uncertain about their legitimacy, consult a tax advisor or lawyer immediately. Do not delay—regulatory action is swift.

For Regulated Entities & Compliance Teams:

1. Update screening systems: Immediately integrate the SBN entity list (and all UAPA Schedule I entries) into your Know Your Customer (KYC) and Customer Due Diligence (CDD) software systems.
2. Historical account review: Conduct a full screening of all existing accounts opened in the last 5 years against the updated UAPA list. Document all screening reports.
3. Establish FIU-IND reporting protocol: Designate an officer responsible for submitting all suspicious account reports to FIU-IND within the prescribed timeline (typically within 7 days of discovery).
4. Monitor amendments: Subscribe to Ministry of Home Affairs notifications to stay updated on any amendments to UAPA Schedule I. The RBI circular specifically states that future amendments must be implemented immediately.
5. Staff training: Train all front-line staff (relationship managers, branch staff, account opening teams) on the new list and compliance procedures.

Key Takeaways

• Shahzad Bhitti Network (SBN) is now an officially designated terrorist organisation under UAPA 1967 as of September 16, 2026, and all regulated entities must comply immediately.
• Bank accounts linked to SBN or any related entity will be frozen without notice, and funds cannot be accessed until clearance from authorities is obtained.
• Income from terrorist organisations is disallowed under Income Tax Act 1961 Section 69B and attracts penalties of 50-100% under Section 271(1)(c) or Section 271AAB of Income Tax Act 2025.
• Compliance reporting to FIU-IND is mandatory for all regulated entities with no exceptions or grace period—non-compliance invites RBI penalties and potential license suspension.
• For AY 2026-27, any taxpayer with connections to designated terrorist organisations faces criminal liability under UAPA 1967 in addition to civil tax penalties and disallowance of income.

Bottom Line: This is a serious compliance matter that extends beyond banking into tax and criminal law. If you have any doubt about the legitimacy of your income sources or bank transactions, seek professional advice immediately. Ignorance is no defence under UAPA 1967.

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