Income Tax on Educational Institution (Private School)

Income of Education Institution

Income of the charitable trust is exempt u/s 11 of the Income Tax Act (Act) if the same has been registered u/s 12AA of the Act. However, Income of the  educational institution who has not registered u/s 12AA of the shall exempt u/s 10(23C) of the Act on fulfilment of certain conditions. Exemption provisions of Section 10(23C) and Section 11 are more or less similar. Summary of the section 10(23C) of the Act in respect of exemption is  as given below:-

1. Institution whose annual receipt does not exceed Rs. 5 crore. [10(23C)(iiiad)].

The income of any university or other educational institutions shall be exempt from tax under this provision on fulfilment of the following conditions:

• It is existing solely for educational purposes.
• It is not existing for purpose of profit and
• Its annual receipt do not exceed Rs. 5 crores.

2. Any other university or educational institution. (10(23C)(vi)].

The income of any university or other educational institution shall be exempt from tax under this provision on fulfilment of following conditions :

• It is existing solely for educational purposes.
• It is not existing for purpose of profit.
• It is not wholly or substantially financed by Government.
• Its annual receipts exceed Rs. 5 Crores

3. It is approved by the Principal Commissioner or Commissioner.

Condition of the Exemption

• Income or accumulation of income of the institution shall apply wholly and exclusively  to the objects for which it is established
• In case where more than fifteen percent of its income is accumulated the period of accumulation shall in no case exceed five years
• Invest or deposit its funds in the form and mode specified in the section 11(5) of the Act

Utilization of the Fund by the Trustees

• Exemption u/s 10(23C) of the Act shall apply to educational institution solely for educational purpose and not for the purpose of profit & basic condition to claim exemption  is to apply the income towards wholly and exclusively to the object for  which it is established. Hence  if the institution shall not apply the income for the education purpose and apply the fund for the benefit of the any person then it shall not be eligible  for the benefit under this section.

Under section 13 of the Act, trusts or institutions under the second regime are required not to pass on any unreasonable benefit to the trustee or any other specified person. It is proposed to insert twenty first proviso in clause (23C) of section 10 of the Act to provide that where the income or part of income or property of any trust or institution under the first regime, has been applied directly or indirectly for the benefit of any person referred to in sub-section (3) of section 13, such income or part of income or property shall be deemed to be the income of such person of the previous year in which it is so applied. The provisions of sub-section (2), (4) and (6) of section 13 of the Act shall also apply to trust or institution under the first regime. ii) This amendment will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years