Section 10(23C) — Education & Hospital Exemption

Section 10(23C) of the Income Tax Act 1961 provides income tax exemption to educational institutions existing solely for educational purposes and not for profit. Sub-clause (iiiab) exempts universities or educational institutions wholly or substantially financed by the government. Sub-clause (iiiad) exempts educational institutions with aggregate annual receipts not exceeding Rs 5 crore — these institutions self-certify and do not require approval from the prescribed authority. Institutions with annual receipts exceeding Rs 5 crore must obtain approval from the Principal Commissioner of Income Tax or Commissioner of Income Tax, as prescribed under Sub-clause (vi), and file Form 56D for the purpose.

An educational institution with annual receipts exceeding Rs 5 crore must apply for approval under Section 10(23C)(vi) of the Income Tax Act 1961 by filing Form 56D with the Principal Commissioner or Commissioner of Income Tax having jurisdiction. Following the Finance Act 2022, new applicants must file Form 10A for provisional registration before commencement and Form 10AB for regular registration once three years of operation are completed, under the procedure harmonised with the Section 12AB framework by Circular No. 2/2022 and subsequent CBDT guidance. The approval is now granted on the income tax portal and is valid for a period of five years, renewable by filing Form 10AB at least six months before expiry. The institution must demonstrate that its income is applied solely for educational purposes and that no part of its income inures to any private person.

An educational institution approved under Section 10(23C)(vi) of the Income Tax Act 1961 must apply at least 85% of its income from all sources — including fees, donations, and grants — to educational purposes in India during the same previous year. Where the full 85% is not applied in the year, the institution can accumulate the unapplied portion for application within five subsequent years by filing Form 10 (now submitted electronically on the income tax portal) before the due date of filing the income tax return for the relevant year. If the accumulated amount is not applied within the five-year period, the unused amount is treated as income of the year in which the five-year period expires and is taxed accordingly under the proviso to Section 10(23C). The 85% threshold is computed on total income before exemption.

No. An educational institution holding approval under Section 10(23C)(vi) of the Income Tax Act 1961 must invest or deposit its funds only in the modes specified in Section 11(5) of the Income Tax Act 1961, which applies by cross-reference to Section 10(23C) institutions. Permitted investment modes include bank deposits in scheduled banks, post office deposits, government securities, units of UTI or approved mutual funds, immovable property, and bonds of public financial institutions. Investments in private company shares, unlisted debentures, or speculative instruments are not permitted and jeopardise the institution's exempt status. Any violation of Section 11(5) results in the entire income of the institution for the year becoming taxable.

Ancillary activities such as running a student hostel, canteen, or stationery shop within the campus are generally treated as incidental to the educational objects and do not per se disqualify the institution from exemption under Section 10(23C) of the Income Tax Act 1961, provided the profits from such activities are applied for educational purposes and the activity is subordinate to the main educational objective. However, if such activities generate substantial commercial profits or are conducted as independent profit centres serving the general public beyond the student community, the prescribed authority may take the view that the institution is not existing 'solely' for educational purposes, which is a condition precedent for exemption. The CBDT Circular No. 11/2008 and judicial decisions provide guidance on the permissible extent of ancillary activities. Any surplus from ancillary activities must be ploughed back to educational objects and clearly accounted for.