Educational Institution: Income Tax Perspective

Rajdeep Saini

02 Nov, 2020

Income tax on educational institutions often remains the most controversial topic. The nature of the educational institutions such as high-end educational institutions providing up to date and equipped educational aids, offering air-conditioned buses and the classrooms and maintaining the highest standard of hygiene is involved in the activities which are charitable or commercial.

Though both are starting from the word “C”, they carry a huge difference in respect to the taxation purpose. The societies that run the school or the charitable trust, their income will be exempted from the income tax in accordance with Section 11, 12, and 13 of the Income Tax Act. Provided that, to avail, such exception the charitable trust or the society must prove that they fall under the definition of the charitable purpose under the income tax act.

Income tax applicability on Educational institution

All the educational institutions who are claiming to be exempted the section 10(23C) would mandate to file the return of their Income Tax in the cases where their income surpasses the maximum amount which is not chargeable to income tax. Earlier, any receipts of Indian or foreign institutes, incorporated solely for the educational purpose and not for other purpose such as profit-making are exempted under the income tax act. At present, an institution whose yearly receipts are more than one crore is required to file the returns. 

Applicability of Section 10(23C) on the Educational Institution

Government Education Institution

Income generated by any educational institute or any university solely for the purpose of education and not for profit-making and which is substantially or wholly financed by the government is fully exempted by the Income Tax under section 10(23C)(iiiab). Hence, it is clear that educational institution is fully exempted under the income tax until and unless it is not for profit purpose.

Non-government Educational Institution

The exemption for the private or non-government institution will solely depend on the annual receipts of the educational institution or the university.

Educational Institution with yearly revenue up to Rs 1 Crore

Under section 10(23C) (iiiad) it is stated that the revenue earned by the university or any educational institution existing only for the educational purposes rather than the profit purpose shall be exempted from the income tax if the total yearly receipts of such educational institution or the university shall not exceed Rs. one crore.

It is crucial to note that the term annual receipts are not defined under the law. The term annual receipts should be interpreted by looking at the intent of the provisions, it should be meant that the receipts from the fees and charges collected by the institution.

Educational Institution with yearly revenue exceeding Rs 1 Crore

In case of exception of an educational institute the receipts exceed Rs 1 Crore is regulated by the section 10(23C) (vi) which mentions that the educational institution^[1] or the university other than mentioned in the sub clause (iiiab) or (iiiad), will be exempted if they get approval by the prescribed authority. Hence, where the receipts exceed the amount of Rs 1 Crore, that particular institution will require separate approved for claim exemption under this act.

Further Conditions for educational institutions having receipt excess of Rs 1 Crore:

Spend minimum of 85%

The educational institution must spend its income exclusively or wholly to the purpose and objects for what it were established. Moreover, the educational institution must apply at a minimum of 85% of his income every year. Hence, just the registration U/s 10(23C) by itself does not mean or result in the exemption. Further, it must be noted that the educational institution is allowed to retain up to 15% of the total income. In any case, when the institution is unable to maintain 85% of the income, the educational institution shall accumulate the excess income for application in the coming years but not exceeding five years.

Investments

After the minimum expenditure, the second major condition is that the institution shall invest its own money into the modes specified u/s 11(5). It is similar to the rule applicable to Section 12AA registered trust.

Income Tax Return

If we this with the virtue of section 139(4C) every educational institution whose income without affecting the provision of section 10, surpasses the maximum amount which is not chargeable to the income tax, must furnish a return of Income.

Audit

When the actual income of the institution, without effecting any provision of this section, exceeds the maximum receipts which in previous year is not chargeable to tax, such educational institutions must furnish along with the income tax return with respect to the relevant assessment year.

Corpus Donations to Trusts

At last, according to Section 10(23C) provides that any receipts credited of any educational institution or university to any trust or an intuition incorporated under section 12AA, well known as a Corpus donation will not be treated as application of Income to the purpose for which that institution or the university is established. Therefore, all the institution that are registered under section 10(23C) (vi) shall be barred from giving donations.

Conclusion

Read our article:All Types of Income Tax Return Filing In India