Income Tax planning for school

[Sandeep Rawat]

A. Government Educational Institutions: 

Income received by any university or educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government is fully exempt from tax vide Section 10(23C)(iiiab). Hence, a Government educational institution is fully exempt from income tax without any separate approvals etc. as long as it is not for profit purpose.

B. Non-government Educational Institutions: 

The exemption for non-government (private) educational institutions depends upon the aggregate annual receipts of the university / educational institution.

1. Educational Institutions with annual receipts up to ₹ 1 crore:

Section 10(23C)(iiiad) provides that the income earned by any university or educational institution existing solely for educational purposes and not for the purposes of profit shall be exempt from tax if the aggregate annual receipts of such university or educational institution do not exceed ₹ 1 crore.

Thus, an educational institution having receipts upto ₹ 1 crore can claim full exemption under the above clause without requiring a separate approval or registration.

Here it is important to note that the term “annual receipts” has not been defined under the law. Keeping in mind the intention of the provisions, annual receipts should mean receipts from the various fees and charges collected by the institution. It can also include the receipts from donations.

2. Educational Institutions with annual receipts exceeding ₹ 1 crore: 

Exemption in the case of an educational institution having receipts exceeding ₹ 1 crore is governed by Section 10(23C)(vi) which states that income earned by any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad), shall be exempt if they are approved by the prescribed authority. Thus, where the aggregate receipts of the institution exceeds ₹ 1 crore, the institution needs a separate approval for claiming the exemption u/s 10(23C).

The Application for approval is required to be made in Form No. 56D along with the necessary supporting documents before the Commissioner of Income Tax (Exemptions). Like the approval u/s 12AA, the approval u/s 10(23C) is also available indefinitely unless it is rescinded by the authorities.

There are some further conditions prescribed for an educational institution having receipts in excess of ₹ 1 crore. The third proviso to Section 10(23C) provides for the following two conditions:

i) Spend minimum 85%: The educational institution shall apply (spend) its income wholly and exclusively to the objects for which it is established. Further, the institution shall apply at least 85% of the income every year. Thus, just registration u/s 10(23C) by itself does not result in full exemption. The institution shall spend at least 85% of total income in order to claim full exemption. It may be noted that the institution is allowed to retain up to 15% of total income without any conditions.

In case the income applied falls short of the said 85%, the institution can accumulate such excess income for application in subsequent year(s) not exceeding five years.

However, the accumulated amounts are required to be spent by the institution on its own and it cannot spent the same by way of donations (corpus or otherwise) to any trust registered u/s 12AA or any other institution claiming exemption u/s 10(23C).

From the above, it is clear that the provisions are similar to the one available u/s 11 to the Trusts registered u/s 12AA. The only difference here seems to be that there is no need to pass a trustees’ resolution to accumulate the income and no need to file a separate Form and specify the purpose of accumulation (unlike Form No. 10 in the case of 12AA registered trusts).

ii) Investments: The second condition is that the institution shall invest its money only in the modes specified u/s 11(5). This is once again similar to the provisions applicable to a trust registered u/s 12AA.

iii) Other Conditions:

1. Income Tax Return: By virtue of 139(4C) every educational institution referred to in sub-clause (iiiad) or sub-clause (vi) of Section 10(23C) whose total income, without giving effect to the provisions of section 10, exceeds the maximum amount which is not chargeable to income-tax, shall furnish a return of income. Therefore, if the total receipts of the institution exceeds ₹ 2,50,000/-, it shall file the return of income. The Form of ITR is ITR-7, the same as applicable to a Section 12AA registered Trust.
2. Audit: Proviso no. 10 to Section 10(23C) provides that where the total income of the institution, without giving effect to the provisions of this section, exceeds the maximum amount which is not chargeable to tax in any previous year, such institution shall get its accounts audited and furnish along with the return of income for the relevant assessment year, the report of such audit Form No. 10BB. Therefore, if the total receipts of the institution exceeds ₹ 2,50,000/-, it shall file the return of income.
3. Corpus Donations to other Trusts: Proviso no. 12 to the Section 10(23C) further provides that any amount credited or paid out of income of any university or educational institution to any trust or institution registered under section 12AA, being a corpus donation shall not be treated as application of income to the objects for which such university or educational institution is established. Therefore, the educational institutions registered u/s 10(23C)(vi) are barred from giving corpus donations to other Trusts registered u/s 12AA.
4. Other Provisions: Applicability of other provisions like deduction of tax at Source (TDS) on expenses are fully applicable to an educational institution. Therefore, an educational institution is required to deduct tax from payments, wherever required, in order to claim the amount as application of income.

For further clarification and professional assistance, feel free to contact SRTConsultancy & Co. at [email protected]