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Section 10(23C) — Education & Hospital Exemption

Section 10(23C)

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Overview

Section 10(23C) exemption services cover the registration and the compliance of the educational and the charitable institutions under Section 10(23C) of the Income-tax Act 1961 — the exemption for the income of the universities, the educational institutions and the hospitals existing solely for the educational or the medical purposes and not for the profit, notified under the specified clauses of the section — with the application to the prescribed authority, the conditions, the audit and the returns. The exemption is the route through which the large educational institutions and the hospitals keep their income tax-free.

The Section 10(23C) exemption is the alternative to the Section 12A/12AB route for the qualifying institutions — the universities, the educational institutions and the hospitals whose income is applied wholly to the educational or the medical objects. The approval is sought from the prescribed authority under the section, the institution must comply with the conditions — the application of the income, the audit, the non-profit operation — and the audit and the return follow under the Act.

The cost of a lapsed Section 10(23C) approval is the taxation of the institution's income: the income that was exempt becoming taxable, the accumulated years and the assessments, and the institution's finances restructured under the tax. The approval and its compliance are the institution's tax life.

This service is for educational institutions, universities and hospitals seeking or holding the Section 10(23C) exemption. We assess the eligibility and prepare the application to the prescribed authority, manage the conditions and the compliance under the Act, conduct the audit and file the returns, and keep the approval current through the renewals and the changes.

How It Works

  1. 1

    Eligibility Assessment

    We assess the institution's eligibility under Section 10(23C).

    Harun Raaj & Associates does this1 week
  2. 2

    Application to the Authority

    We prepare and file the application with the prescribed authority.

    Harun Raaj & Associates does this3-6 weeks
  3. 3

    Conditions Compliance

    We manage the conditions — application of income, non-profit, records.

    Harun Raaj & Associates does thisOngoing
  4. 4

    Audit & Returns

    We conduct the audit and file the returns under the Act.

    Harun Raaj & Associates does thisAnnual
  5. 5

    Approval Maintenance

    We keep the approval current through the renewals and the changes.

    Harun Raaj & Associates does thisAs required

Frequently Asked Questions

Which educational institutions qualify for exemption under Section 10(23C) of the Income Tax Act 1961?
Section 10(23C) of the Income Tax Act 1961 provides income tax exemption to educational institutions existing solely for educational purposes and not for profit. Sub-clause (iiiab) exempts universities or educational institutions wholly or substantially financed by the government. Sub-clause (iiiad) exempts educational institutions with aggregate annual receipts not exceeding Rs 5 crore — these institutions self-certify and do not require approval from the prescribed authority. Institutions with annual receipts exceeding Rs 5 crore must obtain approval from the Principal Commissioner of Income Tax or Commissioner of Income Tax, as prescribed under Sub-clause (vi), and file Form 56D for the purpose.
How does an educational institution with receipts above Rs 5 crore apply for approval under Section 10(23C)?
An educational institution with annual receipts exceeding Rs 5 crore must apply for approval under Section 10(23C)(vi) of the Income Tax Act 1961 by filing Form 56D with the Principal Commissioner or Commissioner of Income Tax having jurisdiction. Following the Finance Act 2022, new applicants must file Form 10A for provisional registration before commencement and Form 10AB for regular registration once three years of operation are completed, under the procedure harmonised with the Section 12AB framework by Circular No. 2/2022 and subsequent CBDT guidance. The approval is now granted on the income tax portal and is valid for a period of five years, renewable by filing Form 10AB at least six months before expiry. The institution must demonstrate that its income is applied solely for educational purposes and that no part of its income inures to any private person.
What is the 85% application requirement for an exempt educational institution?
An educational institution approved under Section 10(23C)(vi) of the Income Tax Act 1961 must apply at least 85% of its income from all sources — including fees, donations, and grants — to educational purposes in India during the same previous year. Where the full 85% is not applied in the year, the institution can accumulate the unapplied portion for application within five subsequent years by filing Form 10 (now submitted electronically on the income tax portal) before the due date of filing the income tax return for the relevant year. If the accumulated amount is not applied within the five-year period, the unused amount is treated as income of the year in which the five-year period expires and is taxed accordingly under the proviso to Section 10(23C). The 85% threshold is computed on total income before exemption.
Can an educational institution under Section 10(23C) invest its surplus funds freely?
No. An educational institution holding approval under Section 10(23C)(vi) of the Income Tax Act 1961 must invest or deposit its funds only in the modes specified in Section 11(5) of the Income Tax Act 1961, which applies by cross-reference to Section 10(23C) institutions. Permitted investment modes include bank deposits in scheduled banks, post office deposits, government securities, units of UTI or approved mutual funds, immovable property, and bonds of public financial institutions. Investments in private company shares, unlisted debentures, or speculative instruments are not permitted and jeopardise the institution's exempt status. Any violation of Section 11(5) results in the entire income of the institution for the year becoming taxable.
Does an educational trust lose its Section 10(23C) exemption if it runs a commercial canteen or hostel?
Ancillary activities such as running a student hostel, canteen, or stationery shop within the campus are generally treated as incidental to the educational objects and do not per se disqualify the institution from exemption under Section 10(23C) of the Income Tax Act 1961, provided the profits from such activities are applied for educational purposes and the activity is subordinate to the main educational objective. However, if such activities generate substantial commercial profits or are conducted as independent profit centres serving the general public beyond the student community, the prescribed authority may take the view that the institution is not existing 'solely' for educational purposes, which is a condition precedent for exemption. The CBDT Circular No. 11/2008 and judicial decisions provide guidance on the permissible extent of ancillary activities. Any surplus from ancillary activities must be ploughed back to educational objects and clearly accounted for.

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