Overview

Educational Institutions are institutions which are formed with the main purpose of providing education to the society. Income received by such educational institutions are exempted under Income Tax Act upon fulfilling listed criteria.

 The Finance Act 2002, had made it mandatory for the organizations to spend at least 85% of it’s income on the educational purpose.

 Guidelines for registration under Income Tax

Any university or educational institution whose annual turnover exceeds Rs. 1 crore should make an application to Chief Commissioner or Director General of Income Tax for granting approval u/s 10(23C). The organisations can also obtain exemptions u/s 12AA.

After verification and satisfying the genuineness of the activities, the authorities would grant the approval. Any delay in making application can be condoned by authorities on the merits.

Its worth to refer case https://itatonline.org/archives/pinegrove-international-charitable-trust-vs-uoi-p-h-high-court-s-1023cv-benefit-cannot-be-denied-merely-because-there-are-profits-in-computing-the-profits-capital-expenditure-has-to-be-deducted/ to understand the test of predominant objective of the organisation.

 Criteria under Section 10(23C) for availing exemption:

The income of any university or educational institution which is approved under Sec 10(23C) will be exempted only on fulfillment of the below conditions:

·       It is existing wholly for the purpose of education.

·       It is not existing for the purpose of profit.

·       It’s annual receipt does not exceed Rs. 5 crores.

 Exemption is available only in respect of business income and the business is incidental to the attainment of its objectives and separate books of accounts are maintained in respect of such business.

Further to the above conditions,

·       Income or accumulations (unutilized income which is accumulated for using against specified purpose) of the organization shall apply only to the educational purposes.

·       In case, where more than 15% of the income is accumulated,  period of accumulation does not exceed 5 years

·   Invest or deposit its funds in the form and mode specified only.

Form/Mode of depositing the accumulated income:

·   Investment in Savings certificates as defined in clause (c) of section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government;

·   Deposit in any account with the Post Office Savings Bank;

·   Deposit in any account with a scheduled bank or a co-operative society

·       Investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963);

·       Investment in any security for money created and issued by the Central Government or a State Government;

·       Investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government.

Conclusion:

Educational institutions need continues monitoring of income and expenses and also regular updating of approvals with the tax authorities. Maintaining books of accounts in the required format and filing of mandatory tax forms and submissions are crucial for institutions to avail the exemptions available. However, all the conditions mentioned in the tax laws apply only to the income of the institution and not on the profit earned by the institutions. Tax laws does not prohibit educational institutions from earning profits, but want to make sure that the sole purpose of the organization is not earning profit, but providing education.