Tax Exemption for Educational Institutions Under Sections 10 and 11

Income of Educational Institutions

Income generated by charitable trusts is exempt under Section 11 of the Income Tax Act (the Act), provided they are registered under Section 12AA. However, educational institutions not registered under Section 12AA can still qualify for exemptions under Section 10(23C) if they meet specific criteria. The exemption provisions of Section 10(23C) and Section 11 are largely aligned in their intent. Below is a summary of Section 10(23C) pertaining to exemptions.

Categories of Educational Institutions

1. Institutions with Annual Receipts Not Exceeding Rs. 5 Crore

Educational institutions, including universities, are exempt from tax if they satisfy these conditions:

• They exist solely for educational purposes.
• They do not operate for profit.
• Their annual receipts do not exceed Rs. 5 crores.

2. Other Universities or Educational Institutions

For universities or educational institutions that exceed the Rs. 5 crore threshold:

• They must exist exclusively for educational purposes.
• They cannot operate with the motive of profit.
• They should not be substantially financed by government sources.
• Their annual receipts must exceed Rs. 5 crores.
• Approval by the Principal Commissioner or Commissioner is necessary.

Conditions for Exemption

For an institution to benefit from these exemptions:

• Income or income accumulation must be utilized entirely for the objectives it was established to achieve.
• If more than 15% of income is accumulated, this accumulation period cannot exceed five years.
• Investments or deposits must comply with the specifications detailed in Section 11(5) of the Act.

Utilization of Funds by Trustees

Exemptions under Section 10(23C) apply strictly to educational purposes and cannot be used for profit. A fundamental requirement is that income must be applied wholly and exclusively toward the institution’s educational objectives. Should an institution redirect funds for purposes other than education, or benefit specific individuals, it will forfeit eligibility for exemption.

According to Section 13 of the Act, trusts or institutions falling under the second regime must avoid providing unreasonable benefits to trustees or any specified individuals. A proposed 21st proviso in Clause (23C) of Section 10 aims to clarify that any part of an institution's income or property allocated for the benefit of individuals identified in Sub-section (3) of Section 13 will be taxed as the income of those individuals in the year it was allocated. Additionally, provisions in Sub-sections (2), (4), and (6) of Section 13 will also be extended to trusts or institutions under the first regime.

This amendment is effective from April 1, 2023, applying to the assessment year 2023-24 and subsequent assessment years.