Analysis of the Income Tax Exemptions available to certain Educational Institutions under Section 10(23C) of the Income Tax Act, 1961 and comparison of the same with exemption available under Section 11.

Background: Section 11 is a popular section for claiming exemption from income tax among the non-government charitable trusts and institutions. Most of the charitable trusts, big or small are registered u/s 12AA of the Act and claim exemption u/s 11. While the exemptions available u/s 11 are general and available to all the charitable organisations, Section 10(23C) of the Act is a specific exemption available to certain Government and non-government universities and educational institutions.

By way of this note, we will analyse the conditions prevalent for claiming of exemption by Government and non-government educational institutions.

A. Government Educational Institutions: Income received by any university or educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government is fully exempt from tax vide Section 10(23C)(iiiab). Hence, a Government educational institution is fully exempt from income tax without any separate approvals etc. as long as it is not for profit purpose.

B. Non-government Educational Institutions: The exemption for non-government (private) educational institutions depends upon the aggregate annual receipts of the university / educational institution.

1) Educational Institutions with annual receipts up to Rs. 1 crore: Section 10(23C)(iiiad) provides that the income earned by any university or educational institution existing solely for educational purposes and not for the purposes of profit shall be exempt from tax if the aggregate annual receipts of such university or educational institution do not exceed Rs. 1 crore.

Thus, an educational institution having receipts upto Rs. 1 crore can claim full exemption under the above clause without requiring a separate approval or registration.

Here it is important to note that the term “annual receipts” has not been defined under the law. Keeping in mind the intention of the provisions, annual receipts should mean receipts from the various fees and charges collected by the institution. It can also include the receipts from donations.

2) Educational Institutions with annual receipts exceeding Rs. 1 crore: Exemption in the case of an educational institution having receipts exceeding Rs. 1 crore is governed by Section 10(23C)(vi) which states that income earned by any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad), shall be exempt if they are approved by the prescribed authority. Thus, where the aggregate receipts of the institution exceeds Rs. 1 crore, the institution needs a separate approval for claiming the exemption u/s 10(23C).

The Application for approval is required to be made in Form No. 56D along with the necessary supporting documents before the Commissioner of Income Tax (Exemptions). Like the approval u/s 12AA, the approval u/s 10(23C) is also available indefinitely unless it is rescinded by the authorities.

There are some further conditions prescribed for an educational institution having receipts in excess of Rs. 1 crore. The third proviso to Section 10(23C) provides for the following two conditions:

i) Spend minimum 85%: The educational institution shall apply (spend) its income wholly and exclusively to the objects for which it is established. Further, the institution shall apply at least 85% of the income every year. Thus, just registration u/s 10(23C) by itself does not result in full exemption. The institution shall spend at least 85% of total income in order to claim full exemption. It may be noted that the institution is allowed to retain up to 15% of total income without any conditions.

In case the income applied falls short of the said 85%, the institution can accumulate such excess income for application in subsequent year(s) not exceeding five years. For example-

Gross Income                          :           Rs. 2,00,00,000/-

85% of the Gross Income       :           Rs. 1,70,00,000/-

Actual Amount Spent             :           Rs. 1,40,00,000/-

In this case, the shortfall of Rs. 30,00,000/- can be accumulated by the institution which can be spent in the subsequent five years.

However, the accumulated amounts are required to be spent by the institution on its own and it cannot spent the same by way of donations (corpus or otherwise) to any trust registered u/s 12AA or any other institution claiming exemption u/s 10(23C).

From the above, it is clear that the provisions are similar to the one available u/s 11 to the Trusts registered u/s 12AA. The only difference here seems to be that there is no need to pass a trustees’ resolution to accumulate the income and no need to file a separate Form and specify the purpose of accumulation (unlike Form No. 10 in the case of 12AA registered trusts).

ii) Investments: The second condition is that the institution shall invest its money only in the modes specified u/s 11(5). This is once again similar to the provisions applicable to a trust registered u/s 12AA.

iii) Other Conditions:

a) Income Tax Return: By virtue of 139(4C) every educational institution referred to in sub-clause (iiiad) or sub-clause (vi) of Section 10(23C) whose total income, without giving effect to the provisions of section 10, exceeds the maximum amount which is not chargeable to income-tax, shall furnish a return of income. Therefore, if the total receipts of the institution exceeds Rs. 2,50,000/-, it shall file the return of income. The Form of ITR is ITR-7, the same as applicable to a Section 12AA registered Trust.

b) Audit: Proviso no. 10 to Section 10(23C) provides that where the total income of the institution, without giving effect to the provisions of this section, exceeds the maximum amount which is not chargeable to tax in any previous year, such institution shall get its accounts audited and furnish along with the return of income for the relevant assessment year, the report of such audit Form No. 10BB. Therefore, if the total receipts of the institution exceeds Rs. 2,50,000/-, it shall file the return of income.

c) Corpus Donations to other Trusts: Proviso no. 12 to the Section 10(23C) further provides that any amount credited or paid out of income of any university or educational institution to any trust or institution registered under section 12AA, being a corpus donation shall not be treated as application of income to the objects for which such university or educational institution is established. Therefore, the educational institutions registered u/s 10(23C)(vi) are barred from giving corpus donations to other Trusts registered u/s 12AA.

d) Other Provisions: Applicability of other provisions like deduction of tax at Source (TDS) on expenses are fully applicable to an educational institution. Therefore, an educational institution is required to deduct tax from payments, wherever required, in order to claim the amount as application of income.

Conclusion: From the above discussion, it is clear that the exemption provisions of Section 10(23C) and Section 11 are more or less similar. Both have similar conditions and requirements for claiming the exemption. However, Section 10(23C) has less requirements when it comes to accumulation of income i.e. there is no need to file a separate Form and no need to specify the purposes of accumulation.

Disclaimer: The above analysis is based on the current position of the income tax laws and our understanding of the same. The income tax laws are subject to frequent changes and the foregoing analysis may need to be updated with subsequent changes in the law.

Author Bio

Qualification: CA in Practice
Company: N/A
Location: Maharashtra, IN
Member Since: 28 Apr 2019 | Total Posts: 1

More Under Income Tax

26 Comments

  1. MOHIT MITTAL says:

    Hey everyone! I have a query regarding matter under discussion i.e. Section 10(23)(iiiad) states that if an educational institution’s annual receipts are upto Rs. 1 crore (limit prescribed vide Rule 2BC) than ANY INCOME earned by it is not included in the total income chargaeble to tax.
    In my case, we have an AOP running school and college with annual receipts upto 1 crore. Further, it has some interest income of Rs. 2.35 lakhs on fixed deposits that it has made with education board. TDS @ 10% has been deducted on the same by the payer.
    Now, my doubt is how to show this interest income in ITR-7 because if I show this income under head other sources then a tax liability is being calculated on the same at MMR. Pls clarify. I will be thankful.

  2. PRADEEP KUMAR says:

    How it’s possible for IT dept to ascertain an educational institution imparting education to students without any profit making intention//desire. Moreover now a days providing education to students became a lucrative business while charging hefty donations & fees.

  3. KAMLESH JOSHI says:

    SIR, I AM VERY MUCH IMPRESSED OF YOUR COMPARIOSSION
    SIR, KINDLY MAKE THIS TYPE OF KNOWLEDGE PLATFORM FOR US SEC 11 OF CHARITABLE TRUST?

  4. balasubramanya T says:

    Educational Institution constitution Trust, gross receipts is less than One Crore, whether they will be provided with Income tax exemtption certificate,

  5. sanjoy ghatak says:

    TDS exemption against u/s 10(23C)(iiiab) is still applicable for Any university or other educational institution existing solely for Educational purposes and not for purposes of profit, which is wholly or Substantially financed by the Government

  6. Harshad says:

    we are semi govt. co. given contact to IIT,Delhi for supervision and cost verificatin of the Project ( Scientific and Technical consultancy) for three months. They are requesting not to deduct TDS on invoice submitted. I think so it is other income of IIT delhi and need to deduct TDS 10% .. What is your Opinion??

  7. Kamlesh Mehta says:

    In Other Conditions, a) Income tax Return: its written that If the total RECEIPTS of any Educational institution is more than 2,50,000/- . They need to file tax Return.

    Here check the word RECEIPT is correct ???. It should be TAXABLE INCOME ( I.e TOTAL RECEIPTS LESS EXPENSES).

  8. CA Sandesh Bothara says:

    Thank you very much for such valuable information, this article solved almost all the queries relating to trust registered u/s 10(23C)

  9. SS says:

    Trust is registered u/12A. It claimed exemption u/s 11. However return was not filed u/s 139(1). AO disallowed exemptions claimed. Receipts are less than 1cr. Can 10(23c)be claimed now even though it was not claimed in original return. registeration has not been obtained under 10(23C).

  10. Netra says:

    In below it says total income and not annual receipts, can you clarify if total receipts exceeds 1cr and total income before exemption u/s 10(23C)(VI) is loss then no audit required ?

    Proviso no. 10 to Section 10(23C) provides that where the total income of the institution, without giving effect to the provisions of this section, exceeds the maximum amount which is not chargeable to tax in any previous year, such institution shall get its accounts audited and furnish along with the return of income for the relevant assessment year, the report of such audit Form No. 10BB.

  11. Netra says:

    Sir Proviso no. 10 to Section 10(23C) provides that where the total income of the institution, without giving effect to the provisions of this section, exceeds the maximum amount which is not chargeable to tax in any previous year, such institution shall get its accounts audited and furnish along with the return of income. – It says total income and not annual receipts.

    1. patidarnitesh1 says:

      The taxability of anonymous donations u/s 10(23C)(iiiad), (iiiae),(iv),(v),(vi),(via) will be governed by the provisions of Section 115BBC, i.e. the Maximum Marginal Rate will apply to such anonymous donations, subject to the thresholds of 5% or Rs. 1 Lakh.

  12. kantu chandra kiran says:

    Sir, we are doing results processing work of govt. universities.
    do we have exemption from paying gst.
    income exeeds above twenty lacs.

  13. BAIBHAV KUMAR says:

    SIR I have received ₹20,00,000 from crowdfunding as donation form iit and iim for health checkup of brain hemorrhage. Whether this donation is chargable to tax.if yes then where to show in income tax return.
    please help in this.I will be so greatful for this help.

    1. patidarnitesh1 says:

      It appears that the donations from crowdfunding mode will be taxable. You need to disclose this income under the head “Income from Other Sources”. You may also avail the deductions of expenses incurred on medical treatment that are available under Chapter VI-A.

    1. patidarnitesh1 says:

      The Approvals for Section 10(23C) and 12AA are both one time and are valid until revoked by the Income Tax Department.

  14. Rajesh Maheshwari says:

    Nice and informative post. I have a quarry – If an educational society earns LTCG, will it be taxable or the principal of accumulation shall apply ? If the society spends LTCG in construction of building (upto 85%), then there would be any tax liability or not ?

  15. akshat says:

    Sir,
    If my trust is registered u/s 10 (23C) and got the account audited. Also filed form 10BB. Does any provision required that the form 10B along with 10BB also to be filed? please help me with relevent caselaw/ provisions.

    1. patidarnitesh1 says:

      Audit Report in Form No. 10B is required to be filed only if the Trust is registered u/s 12AA. If a Trust is registered only u/s 10(23C), then it needs to file only Form 10BB.

Leave a Comment

Your email address will not be published. Required fields are marked *