When it comes to taxation in India, the Income Tax Act offers a range of exemptions to entities working for public welfare. One such powerful exemption is granted under Section 10(23C) of the Income Tax Act, which provides tax exemption for educational & medical institutions. This provision ensures that organisations genuinely working in the field of education or healthcare aren't burdened with income tax, allowing them to reinvest more in community service.
What is Section 10(23C) of the Income Tax Act?
Section 10(23C) of the Income Tax Act, 1961, provides tax exemption to certain funds, Universities, educational institutions, & hospitals. To be eligible under this section, an educational institution must exist solely for educational purposes & not for profit. Similarly, medical institutions must serve healthcare objectives without aiming to generate profit. “
Key Beneficiaries Under Section 10(23C)
Here's a breakdown of who can claim benefits under this section:
- Universities & Educational Institutions (both public & private)
- Hospitals and Medical Institutions
- Funds or charitable trusts that support education or medical relief
These institutions can apply for exemption with the designated income tax authorities & once approved, the income of such institutions becomes exempt from tax, provided they meet the compliance requirements.
Calculation of Income for Exemption
As per the provision, the calculation of income required to be applied or accumulated during the previous year must comply with specific thresholds. Typically, at least 85% of the income must be applied towards the institution’s core objective — either education or medical relief.
Failing to apply the minimum required income or diverting it for unrelated purposes may result in the denial of exemption & taxation of income. “
Compliance Under 10(23C)
Institutions seeking exemption under this section must:
- Maintain proper books of accounts
- Ensure income is applied strictly for educational or medical purposes
- File Form 10BB audit report (if income exceeds the prescribed limit)
- Obtain necessary approvals from the Commissioner or Principal Commissioner of Income Tax
Institutions also need to file regular income tax returns, even if their entire income is exempt.
Types of Exemptions Available
Section 10(23C) is further subdivided into several clauses, like:
- 10(23C)(iiiab): Universities or educational institutions wholly or substantially financed by the government
- 10(23C)(iiiad): Institutions with annual receipts not exceeding the prescribed limit (e.g., ₹5 crore)
- 10(23C)(vi): Institutions not covered under other sub-clauses but approved by the Commissioner
Each clause has its criteria & limits, but the core idea remains the same — if your institution exists solely for educational or medical purposes, & not for profit, you are eligible for exemption.
Why is Section 10(23C) Important?
The exemption under Section 10(23C) is a lifeline for NGOs, trusts, & societies working in the education and healthcare sector. It not only reduces their financial burden but also encourages reinvestment into facilities, infrastructure, & outreach programs.
With rising costs in the education and health sectors, this exemption helps institutions remain sustainable while serving the public.
Common Misconceptions
- "All schools & hospitals are exempt." — Not true. The institution must not operate for profit & needs proper approval to claim exemption.
- “Once approved, you’re exempt forever.” — No. You need to renew or reconfirm your eligibility periodically & adhere to the conditions specified under the Act.
22nd Proviso and Amendments
The 22nd proviso to Section 10(23C) brought in stricter compliance requirements, such as:
- Timely filing of returns
- Proper auditing
- Penalties for non-compliance
Recent amendments also aim to streamline the approval process and reduce misuse of the exemption.
Final Thoughts
Section 10(23C) is a crucial part of India’s tax law that promotes public welfare through education and healthcare. By providing tax exemption for educational & medical institutions, it ensures that genuine organisations aren’t penalised for their noble causes.
If you run or manage such an institution, it's worth exploring whether you qualify for this exemption. Proper compliance & approval can save significant tax costs and amplify your impact.
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