School & Educational Trust Accounting

Charitable trusts running educational institutions are not mandatorily required to follow Indian Accounting Standards (Ind AS) or Companies Act accounting standards, but they are required to maintain books of accounts in the form and manner prescribed under Rule 17AA of the Income Tax Rules 1962, introduced by CBDT Notification No. 94/2022. Books must include cashbooks, ledgers, journals, copies of bills and vouchers, and a register of investments. If the trust is also registered under the Foreign Contribution (Regulation) Act 2010, a separate set of books for foreign contributions must be maintained under Section 17 of the FCRA 2010 and Rule 13 of the FCRA Rules 2011. The Institute of Chartered Accountants of India also publishes guidance notes on accounting by not-for-profit organisations that represent best practices.

A trust registered under Section 12AB of the Income Tax Act 1961 and claiming exemption under Section 11 must get its accounts audited under Section 12A(1)(b) if total income before the exemption under Section 11 exceeds the basic exemption limit (currently Rs 2.5 lakh). The audit must be conducted by a Chartered Accountant and the audit report must be submitted in Form 10B or Form 10BB, as applicable, before the due date of filing the return of income. Form 10B applies where the total income exceeds Rs 5 crore, the trust has received foreign contributions, or it has applied income outside India, per CBDT Notification No. 7/2023. A trust running a school with significant fee collections will almost invariably exceed the basic exemption limit.

Fee income collected from students is income from the pursuit of objects of the trust and, if applied toward educational purposes, is exempt under Section 11(1)(a) of the Income Tax Act 1961 to the extent of 85% of such income applied during the year. Voluntary donations received without any specific direction are corpus or general donations and must be credited to an income and expenditure account with disclosure in the receipts and payments account. Donations received with a specific direction to be treated as corpus must be invested in the modes specified under Section 11(5) of the Income Tax Act 1961 and credited to a corpus fund — they are not income of the year but are shown as a liability item. Mixing fee income and corpus donations in one account is a common accounting error that triggers adverse findings during scrutiny assessments.

A trust registered under Section 12AB of the Income Tax Act 1961 must apply at least 85% of its income to the objects of the trust in the same financial year to claim exemption under Section 11(1)(a). If 85% is not applied, the trust may accumulate up to 15% and, for amounts beyond that, may file Form 9A (for deemed application) or Form 10 (for accumulation up to five years) electronically before the due date of filing the return. The accumulated amount under Form 10 must be applied within five subsequent years and for a specified purpose; failure to apply within the period results in it being deemed income of the year of expiry under Section 11(3) of the Income Tax Act 1961. The filing of Form 10 is mandatory and must precede the actual accumulation decision.

All trusts and institutions registered under Section 12AB of the Income Tax Act 1961 must file for renewal of registration every five years in Form 10AB, as introduced by the Finance Act 2020. The renewal application must be filed at least six months before the expiry of the current registration period, failing which the registration lapses and the trust loses the benefit of exemption under Section 11 for the period without valid registration. Trusts that received provisional registration under Section 12AB (valid for three years for new trusts) must apply for regular registration in Form 10AB at least six months before the provisional registration expires or within six months of commencement of activities, whichever is earlier. A lapse in registration can result in taxation of the full income of the trust at the applicable AOP rates.