Section 10(23C) Income Tax Exemption for Educational Institutions

Section 10(23C): Income Tax Exemption for Universities, Colleges, and Hospitals in India

Section 10(23C) grants income tax exemption to universities, colleges, educational institutions and hospitals that exist solely for education or philanthropy and not for profit. Government-financed institutions and those with annual receipts up to Rs 5 crore are exempt without approval. Larger ones needed approval via Form 10A or Form 10AB, but after the Finance (No. 2) Act, 2024, fresh approval applications from 1 October 2024 are dealt with under the Section 12AB registration regime instead.

Section 10(23C) is the provision that keeps the surplus of India's public and philanthropic education and healthcare sector outside the tax net. When an IIT retains a surplus after meeting its running costs, when a state university carries forward unspent grant money, or when a charitable hospital funds a new wing from patient receipts, it is Section 10(23C) that decides whether that surplus is taxed. The section is old, heavily amended, and structured as a long list of sub-clauses, which is exactly why so many finance officers misread which category their institution falls into.

This guide breaks down the structure of Section 10(23C), explains what "solely for educational purposes" actually means in assessment practice, walks through the approval and audit machinery, and sets out the accumulation rules and the Finance Act 2023 changes. It closes with the 2024 shift towards the Section 12A/12AB route and a comparison of the two so you know which door your institution should be walking through.

What Section 10(23C) Covers

Section 10(23C) of the Income Tax Act, 1961 exempts the income of several distinct categories of entities. It is not a single relief for "educational institutions" but a bundle of exemptions covering government relief funds, notified funds and institutions of national importance, universities and educational institutions, and hospitals and medical institutions.

The internal logic is easiest to grasp by grouping the sub-clauses by how the institution is funded and how large it is:

1. Government relief funds and notified funds. The named public funds (such as the Prime Minister's National Relief Fund) and funds or institutions of national importance notified by the Central Government are exempt outright.
2. Government-financed universities and hospitals. An educational institution or a hospital that is wholly or substantially financed by the Government is exempt with no ceiling on its income and no requirement to apply to any authority for approval.
3. Smaller universities and hospitals. Institutions that exist solely for educational purposes (or for philanthropic treatment of illness) and not for profit, and whose aggregate annual receipts do not exceed the prescribed limit, are exempt without approval. The prescribed limit is currently Rs 5 crore.
4. Larger universities and hospitals. Institutions of the same character but with aggregate annual receipts above Rs 5 crore must obtain approval from the prescribed authority to claim the exemption.

The accuracy point worth stressing: the sub-clause letters (the (iiiab), (iiiad), (vi) style references) are technical and are frequently quoted incorrectly. What matters for compliance is the category, not the letter. A finance officer should first identify whether the institution is government-financed, below the receipts threshold, or above it, and only then map that to the correct clause with the return preparer.

The Core Categories at a Glance

A practical caution on the Rs 5 crore limit: where the same person runs more than one institution, the receipts of all such institutions are aggregated to test the threshold. A trust running both a college and a hospital cannot treat each separately to stay under Rs 5 crore. If the combined receipts cross the limit, the trust moves into the approval-required category.

"Solely for Educational Purposes": The Real Test

The phrase "existing solely for educational purposes and not for purposes of profit" is the heart of the exemption, and it has been the subject of sustained litigation. The Supreme Court's ruling in the New Noble Educational Society line of decisions settled the modern position: "solely" means solely. An institution that carries on activities beyond education, or that is set up so that surplus can be siphoned to founders or related parties, does not qualify merely because education is one of its objects.

Three principles follow from this in day-to-day assessment:

• Object clause discipline. The trust deed or memorandum should confine the institution's objects to education (or to philanthropic medical relief). A wide, mixed-purpose object clause invites a denial of exemption. This is why many education trusts run their school or college through a dedicated vehicle rather than a general-purpose charitable trust.
• No profit motive. Generating a surplus is permitted. Education inevitably produces year-end surpluses that fund expansion. What is not permitted is a design where profit is the purpose, or where surplus is distributed. The test looks at whether the institution predominantly ploughs its surplus back.
• No diversion to interested persons. Payments to founders, trustees, or their relatives that are excessive or not for genuine services are treated as diversion. This overlaps with the specified-persons restrictions that also apply to charitable trusts and can cost the institution its exemption for the year.

The "not for profit" test is applied institution by institution and year by year. A single year of aggressive fee-setting combined with related-party payments can trigger scrutiny even where the institution has held approval for years.

Applying for Approval: Form 10A and Form 10AB

Institutions in the approval-required category (receipts above Rs 5 crore, and not government-financed) had to be approved by the prescribed authority before the exemption was available. Important: the Finance (No. 2) Act, 2024 started phasing out this approval route. Applications for approval under clauses (iv), (v), (vi) and (via) filed on or after 1 October 2024 are dealt with under the Section 12A/12AB registration regime, while approvals already granted continue until they expire, after which the institution moves to Section 12AB. A new large institution should therefore generally apply for registration under Section 12AB. The older Form 56D route has been replaced by the unified application forms used across the charitable and educational exemption regime.

• Form 10A is used for a fresh or provisional approval, including by newly established institutions and by institutions moving into the new approval framework.
• Form 10AB is used for renewal of an approval, for converting a provisional approval into a regular one, and on any change that requires re-approval.

Both forms are filed electronically on the income tax portal under Rule 2C and the connected procedure, with the trust deed or incorporation document, registration certificates, details of objects and activities, and financial statements attached. A provisional approval is granted for a defined period, and the institution must return with Form 10AB to secure the regular approval before that period lapses.

Getting the application right the first time matters because a defective or late filing can leave the institution exposed for an entire assessment year. If you are unsure which form and which timeline apply to your institution, our compliance team can map your approval pathway before anything is filed.

Conditions for Keeping the Exemption

Approval is a gateway, not a permanent shield. To keep the exemption alive, an institution must satisfy the ongoing conditions that mirror those applicable to charitable trusts:

• Books of account. Proper books must be maintained in the prescribed manner where total income before exemption exceeds the basic exemption limit.
• Audit. The accounts must be audited and the audit report furnished in the prescribed form (Form 10B or Form 10BB, depending on the institution's size and profile) before the due date. A late or missing audit report is one of the most common reasons an otherwise compliant institution loses its exemption for the year.
• Return filing. The institution must file its income tax return within the due date to claim the exemption. This is typically ITR 7. Our detailed walkthrough of ITR 7 filing for trusts, societies and NGOs covers the schedules that apply to 10(23C) institutions.
• Application of income. The income must be applied to the institution's objects, subject to the accumulation rules below.
• No commercial drift. The activities must remain confined to the approved objects. Running an unrelated business, or letting the medical or education activity become incidental to a commercial operation, defeats the exemption.

Accumulation of Income: The 85% and 15% Rule

The exemption is built around the expectation that a charitable education or healthcare institution spends its money on its purpose rather than hoarding it. The mechanism is the 85% application rule.

Tax Rate Chart

Section 10(23C): Application and Accumulation of Income

How income must be treated each year to keep the exemption

Minimum application to objects

At least 85% of income must be applied to the institution's educational or philanthropic objects during the year

85%

Free accumulation

Up to 15% of income can be accumulated or set apart with no conditions

15%

Extended accumulation window

Amounts beyond 15% can be accumulated for a specific purpose by filing Form 10, to be applied within the following five years

5 years

Source: Section 10(23C), Income Tax Act 1961; Rule 2C and connected accumulation rules

In practice this means:

• At least 85% of the income derived by the institution must be applied to its objects in the year it is earned.
• Up to 15% of income can be set apart or accumulated without any conditions or filings. This is the standard buffer.
• If the institution wants to accumulate more than 15% for a specific future purpose (say, constructing a new academic block), it must file Form 10 and apply that accumulated amount within five years. Amounts not applied within the window become taxable.

Two refinements introduced in recent Finance Acts are easy to miss. First, the statement of accumulation (Form 9A or Form 10, as applicable) must now be filed at least two months before the due date for filing the return, not along with the return. Miss that window and the accumulation benefit can be denied. Second, a donation made by one exempt institution to another is treated as application only to the extent of 85% of the amount (Finance Act 2023), and a donation made to the corpus of another institution is not treated as application at all. Together these curb the older practice of passing money between related institutions to show full application.

Finance Acts 2020 to 2024: What Changed

A series of Finance Acts from 2020 onwards overhauled the 10(23C) machinery. The key changes that finance officers should have on their radar:

• Five-year approval cycle. Regular approvals now run for five years, after which the institution must apply afresh in Form 10AB. Provisional approvals for new institutions run for a shorter defined period before conversion to regular approval.
• Tighter timelines. Applications for renewal must be filed well before the existing approval expires (broadly, at least six months before expiry), and new institutions must move from provisional to regular approval within a defined window tied to the commencement of activities. Delay is no longer forgiven casually.
• One regime at a time. An institution can no longer simultaneously hold a Section 10(23C) approval and a Section 12AB registration. Trusts that historically carried both had to choose. This removed a long-standing area of duplication and dispute.
• Reduced application on inter-charity donations. As noted above, only 85% of donations to other institutions counts as application, and corpus donations to other institutions do not count at all.
• Sunset of new 10(23C) approvals (Finance (No. 2) Act, 2024). Fresh approval applications from 1 October 2024 move to the Section 12AB regime.
• Consequences for lapses. The framework sharpened the consequences of losing approval, including provisions around taxation of the accreted income (broadly, the net asset value) when an institution exits the exemption regime.

The overall direction is unmistakable: the exemption is now a periodically renewed, closely monitored status rather than a once-granted permanent entitlement.

Section 10(23C) vs Section 12A/12AB

The most common question from education and healthcare trusts is which regime to use. Both exempt the income of not-for-profit institutions, but an entity cannot hold both at once. For institutions that need approval, the Finance (No. 2) Act, 2024 has effectively settled the question in favour of Section 12AB for new applications. For government-financed institutions and those with receipts up to Rs 5 crore, Section 10(23C) still works without any approval. The choice otherwise turns on the breadth of the institution's objects.

From tax year 2026-27, the Income-tax Act, 2025 consolidates the rules for registered non-profit organisations in Sections 332 to 355 (Chapter XVII-B), so check the new section references for returns filed from 2027.

The practical rule of thumb: if the entity is purely an education or medical body, especially a government-financed one or a smaller one below the receipts threshold, Section 10(23C) is usually the cleaner fit and can avoid a separate registration step. If the entity pursues a mix of charitable objects (a general-purpose trust that also runs a school), the 12A/12AB route under Sections 11, 12 and 13 for charitable and religious trusts is generally more appropriate because 10(23C) demands that the institution exist solely for education or medical relief.

A related point institutions often overlook: income tax exemption under 10(23C) says nothing about GST. Educational institutions and hospitals have a separate GST position governed by exemption notifications. If your institution charges fees or runs ancillary services, review the GST treatment in our guide to GST on educational institutions alongside the income tax analysis. The two regimes run on parallel tracks and neither carries over to the other.

Getting the Category Right the First Time

The single most valuable thing a finance officer can do is correctly classify the institution before the assessment year begins. The wrong classification can mean either filing an approval application that was never needed, or claiming exemption without the approval the law required, with the second error being far costlier. Work through this order:

1. Is the institution wholly or substantially financed by the Government? If yes, it is exempt without approval and without a receipts cap.
2. If not, are aggregate annual receipts (across all institutions run by the same person) within Rs 5 crore? If yes, exemption is available without approval, provided the solely-for-education (or philanthropic-medical) and no-profit conditions are met.
3. If receipts exceed Rs 5 crore, the institution needs either a valid existing 10(23C) approval for the relevant period or, for new applications from 1 October 2024, registration under Section 12AB.
4. In every case, maintain books, complete the audit, file the return on time, and satisfy the 85% application rule.

Institutions that treat the exemption as a live compliance obligation rather than a settled entitlement rarely lose it. Those that assume last year's status carries forward automatically are the ones that get caught by a lapsed approval or a late audit report.

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This guide is based on Section 10(23C) of the Income Tax Act, 1961, the amendments introduced by the Finance Acts 2020 to 2023 and the Finance (No. 2) Act, 2024, and the application and accumulation procedure under Rule 2C, Form 10A, Form 10AB, Form 10 and the audit forms 10B and 10BB. The Rs 5 crore aggregate receipts threshold and the approval framework reflect the position for AY 2026-27. Sub-clause references within Section 10(23C) are technical and should be confirmed against the bare Act; monetary limits and timelines can change through Finance Acts or CBDT notifications. Confirm the current position against incometaxindia.gov.in before acting.

Frequently Asked Questions

Does a small private school need approval to claim exemption under Section 10(23C)?

Not if it exists solely for education and not for profit, is not government-financed, and its aggregate annual receipts stay within Rs 5 crore. Receipts of all institutions run by the same person are added together for this test, so a trust running a school and a college cannot split them to stay under the limit. It must still keep books, get its accounts audited and file its return on time.

Can a newly set up educational institution still apply for 10(23C) approval?

The Finance (No. 2) Act, 2024 began moving institutions from the Section 10(23C) approval route to the Section 12A and 12AB registration route. Applications for approval under 10(23C) filed on or after 1 October 2024 are treated under the 12AB regime, while existing approvals continue until they expire. A new institution needing approval should therefore generally apply for registration under Section 12AB.

How much of its income must a 10(23C) institution spend each year?

At least 85% of the year's income must be applied to the institution's educational or medical objects. Up to 15% can be accumulated freely. A larger amount can be set aside for a specific purpose for up to five years by filing Form 10 at least two months before the return due date. Money accumulated but not applied within that period becomes taxable.

What are the audit and return due dates for a 10(23C) institution for AY 2026-27?

The audit report in Form 10B or Form 10BB must be furnished at least one month before the due date of the return, so by 30 September 2026 for institutions whose return is due on 31 October 2026. The return itself is filed in ITR-7. A late audit report or a return filed after the due date can cost the institution its exemption for that year.

Does a Section 10(23C) exemption also exempt the institution from GST?

No. Section 10(23C) is an income tax exemption and has no bearing on GST. Whether fees and other receipts attract GST depends on the GST exemption notifications for educational services and healthcare, which have their own conditions. An institution exempt from income tax can still be liable to register for GST and pay tax on taxable supplies such as certain ancillary or commercial services.

Can a trust with mixed charitable objects claim exemption under Section 10(23C)?

Usually not. Section 10(23C) requires the institution to exist solely for education or for philanthropic medical relief, and not for profit. A general-purpose trust whose objects include, say, relief of the poor and religious activity in addition to running a school does not meet the solely test. Such a trust generally claims exemption under Sections 11 and 12 with registration under Section 12AB.