Section 445 · Penalties
Section 445 of the Income-tax Act, 2025 — Penalty for Benefits to Related Persons by a Non-Profit Organisation
By CA Rajat Agrawal
Updated 05 Jul 2026
Chapter XXI
📜 What the law says — Section 445, Income-tax Act 2025
445. If during any proceedings under this Act, it is found that a person being a
registered non-profit organisation has any specified income which is charge-
able to tax as per section 337 (Table: Sl. No. 2), the Assessing Officer may impose
on such person, a penalty of—
9. Omitted by the Finance Act, 2026, w.e.f. 1-4-2026. Prior to its omission, section 443 read as
under :
“443. Penalty in respect of certain income.—(1) The Assessing Officer or the Joint Commis-
sioner (Appeals) or Commissioner (Appeals) may impose a penalty of 10% of the tax payable
under section 195(1)(i), on an assessee if the income determined in his case for any tax year
includes any income referred to in section 102, 103, 104, 105 or 106.
(2) The penalty under sub-section (1) shall be payable in addition to the tax payable under
section 195.
(3) No penalty shall be levied on income referred to in section 102, 103, 104, 105 or 106 to
the extent such income has been included by the assessee in the return of income furnished
under section 263 and the tax as per section 195(1)(i) has been paid on or before the end of
the relevant tax year.
(4) No penalty under section 439 shall be imposed upon the assessee in respect of income
referred to in sub-section (1).”
(a) a sum equal to the aggregate amount of income applied, directly or in-
directly, by such person, for the benefit of any related person referred to
in section 355(h), if the violation is noticed for the first time during any
tax year; and
(b) a sum equal to 200% of the aggregate amount of income of such person
applied, directly or indirectly, by that person for the benefit of any per-
son referred to in section 355(h), if the violation is noticed again in any
subsequent tax year.
[Penalty for failure to furnish information or for furnishing inaccurate
10
information on transaction of crypto-asset.
In plain language
What Section 445 is about
Section 445 of the Income-tax Act, 2025 is a penalty provision that targets one of the most serious things a charitable or religious trust can do wrong: quietly diverting its funds to the people who run it. When a registered non-profit organisation (NPO) — a trust, society, section 8 company or similar body registered under the new NPO regime (Sections 332 to 355) — applies its income, directly or indirectly, for the benefit of a "related person", the Assessing Officer can impose a monetary penalty on top of the tax already payable on that income.
This section comes into force from 1 April 2026 (Tax Year 2026-27) as part of the Income-tax Act, 2025 (as amended by the Finance Act, 2026). It is broadly the successor to the anti-abuse machinery of Sections 13(1)(c) and 13(3) of the old Income-tax Act, 1961, but now packaged with an explicit, sharp penalty.
Who it applies to
- Only registered NPOs — trusts and institutions that enjoy tax exemption because they are registered under the charitable/religious regime of the 2025 Act.
- The wrongdoing must involve a "related person" as defined in Section 355(i) — essentially the founder, author, trustee, manager, substantial donor, their relatives, and any concern in which such persons have a substantial interest.
- The trigger is that the NPO has "specified income" chargeable to tax under Section 337 because of the benefit given to that related person.
How the penalty works — the amounts
The penalty is deliberately steep and scales up for repeat offenders:
- First violation: penalty equal to 100% of the aggregate amount of income applied, directly or indirectly, for the benefit of the related person.
- Repeat violation (a further breach in any subsequent tax year): penalty equal to 200% of that aggregate amount.
This penalty is in addition to the tax on the specified income itself. Under Section 337 read with Section 334, such "specified income" is taxed at 30%. So a diversion is hit twice — first by 30% tax, then by the 100%/200% penalty.
Key conditions and how it is triggered
- The penalty arises when, during any proceedings under the Act (assessment, reassessment, survey, etc.), the officer finds the NPO has specified income under Section 337 relating to a related-person benefit.
- The words "directly or indirectly" are crucial — routing money through a middle entity, an interest-free loan, rent-free property, an inflated salary, or an over-priced purchase from a trustee's firm all count.
- The provision is intent-neutral: it does not distinguish between a deliberate diversion and an innocent lapse. If the benefit was given in breach, the penalty can follow.
- The penalty is discretionary in imposition ("may impose") but fixed in amount once imposed (100% / 200%).
How it interacts with other sections
- Section 337 is the charging gateway — it defines the "specified income" (including benefit to related persons) that makes Section 445 bite.
- Section 355 supplies the definition of "related person" and "substantial interest" that decides who is off-limits.
- Section 351 can go further and lead to cancellation of registration for such specified violations, and Section 352 can levy accreted income tax at the maximum marginal rate if registration is cancelled.
- An order under Section 445 is appealable — the NPO can challenge it before the Joint Commissioner (Appeals) under the appeal machinery (Section 356 onwards).
Practical implications for trustees
For anyone running a charity, Section 445 raises the cost of self-dealing dramatically. Paying a trustee an unreasonable salary, letting a founder's family live in trust property rent-free, buying goods from a trustee's business at inflated rates, or lending trust money to insiders can now cost the trust the tax at 30% and a penalty of up to twice the diverted amount — plus a real risk of losing registration entirely. Documenting arm's-length pricing, board approvals and reasonableness of payments to insiders is now essential defensive practice.
💡 Example
Example 1 — First violation. Shiksha Kalyan Trust, a registered NPO, pays ₹18,00,000 during TY 2026-27 as "consultancy fees" to a firm owned by its managing trustee, but the fair market value of the actual work done is only ₹6,00,000. The excess of ₹12,00,000 is an indirect benefit to a related person and becomes specified income under Section 337. Tax at 30% = ₹3,60,000. On top of this, because it is a first violation, the Assessing Officer can levy a Section 445 penalty of 100% of ₹12,00,000 = ₹12,00,000. Total hit: ₹15,60,000 against a ₹12,00,000 diversion.
Example 2 — Repeat violation. The next year (TY 2027-28) the same trust again lets the founder's son occupy a trust flat rent-free, with a fair rent of ₹10,00,000. As this is a repeat violation, the penalty jumps to 200% of ₹10,00,000 = ₹20,00,000, plus 30% tax of ₹3,00,000 on the specified income — and the trust now faces possible cancellation of registration under Section 351.
A short story. Meera, the honorary secretary of a small education society, thought she was being frugal by having the society buy stationery from her husband's shop "at cost". During a routine assessment the officer found the invoices were 40% above market rate. What felt like a harmless convenience was treated as an indirect benefit to a related person: the society paid 30% tax on the excess and a matching 100% penalty under Section 445. Meera learned the hard way that with insiders, even good intentions need arm's-length paperwork.
| Situation | Tax on specified income (Sec 337 / 334) | Penalty under Section 445 | Effective total cost |
|---|
| First-time benefit to related person | 30% of the amount | 100% of the amount | 130% of amount diverted |
| Repeat benefit in a later tax year | 30% of the amount | 200% of the amount | 230% of amount diverted |
| Indirect benefit (rent-free asset, inflated purchase, loan) | 30% of the benefit value | 100% / 200% as applicable | Same as above, on fair value of benefit |
| Persistent / serious breach | 30% + possible accreted-income tax (Sec 352) | Penalty + risk of cancellation of registration (Sec 351) | Loss of exemption + MMR tax on net assets |
Related sections
Section 337 — Specified income of a non-profit organisation chargeable to tax Section 355 — Meaning of related person and substantial interest Section 351 — Specified violations leading to cancellation of NPO registration Section 352 — Tax on accreted income on cancellation of registration Section 334 — Rate of tax on specified income (30%) Section 356 — Appealable orders before the Joint Commissioner (Appeals)
Frequently asked questions
Who is a 'related person' for Section 445?
Section 355(i) covers the founder or author of the trust, its trustees, managers and substantial contributors, their relatives, and any concern (firm/company) in which such persons hold a substantial interest. Any income applied for their benefit can attract the penalty.
Is the Section 445 penalty in addition to the tax on the diverted income?
Yes. The diverted amount is first taxed as 'specified income' at 30% under Section 337 read with Section 334, and the Section 445 penalty of 100% (or 200% for repeat cases) is imposed on top of that tax.
Does the penalty apply only to direct payments to insiders?
No. The section expressly covers benefits given 'directly or indirectly', so rent-free use of trust property, interest-free loans, inflated purchases from a trustee's firm and similar arrangements are all caught.
When does the higher 200% penalty apply?
The 200% penalty applies to a repeat violation — where the NPO again applies income for the benefit of a related person in a subsequent tax year after an earlier breach.
Can the trust appeal a Section 445 penalty order?
Yes. A penalty order is an appealable order, and the aggrieved NPO can file an appeal before the Joint Commissioner (Appeals) under Section 356 and the appeal provisions that follow.
Can an innocent or accidental benefit still be penalised?
Potentially yes. The provision does not distinguish between deliberate and unintentional breaches, so trustees should keep documentation showing that payments to insiders are reasonable and at arm's length.
Can giving benefits to related persons also cost the trust its registration?
Yes. Beyond the Section 445 penalty, such conduct is a specified violation that can lead to cancellation of registration under Section 351 and accreted-income tax at the maximum marginal rate under Section 352.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 05 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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