TAX-FREE INCOMES OF HOSPITAL & EDUCATION INSTITUITIONS UNDER THE INCOME TAX ACT-1961

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TAX-FREE INCOMES OF HOSPITAL & EDUCATION INSTITUITIONS UNDER THE INCOME TAX ACT-1961

 

 

There are various knowledge sharing materials which are provided by the Income Tax Department for the update of the member. It acts as a guide to the taxpayers, tax professional & tax authorities in making the due compliances. One such knowledge sharing content is with regard to Tax free income under the provision of Income Tax Act – 1961 with regard to hospital & educational institute. Let us know more about it.

Income of certain national funds [Section 10(23C)(i)/(ii)/(iii)]

Any income received by any person on behalf of the Prime Minister’s National Relief Fund or the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES FUND), the Prime Minister’s Fund (Promotion of Folk Art) or the Prime Minister’s Aid to Students Fund is exempt from tax under clause (i), (ii) and (iii) of section 10(23C) respectively.

Income of National Foundation for Communal Harmony [Section 10(23 C)(iiia)]

Any income of National Foundation for Communal Harmony is exempt from tax under section 10(23C)(iiia).

Income of Swachh Bharat Kosh [Section 10(23C)(iiiaa)]

Income of the Swachh Bharat Kosh, set up by the Central Government is exempt under section 10(23C)(iiiaa).

Income of Clear Ganga Fund [Section 10(23C)(iiiaaa)]

Income of the Clear Ganga Fund, set up by the Central Government is exempt under section 10(23C)(iiiaaa).

Income of Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund [Section 10(23C)(iiiaaaa)]

As per section 10(23C)(iiiaaaa) (as inserted by the Finance Act, 2017 with retrospective effect from the assessment year 1998-99), income of the Chief Minister’s Relief Fund or the Lieutenant Governor’s Relief Fund in respect of any state or union territory is exempt from tax.

Income of Educational Institutions [Section 10(23 C)(iiiab)/(iiiad)/(vi)] Section 10(23 C)(iiiab)

Income of any university or other educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government would be exempt under section 10(23C)(iiiab).

Section 10(23C)(iiiad)

Income of any university or other educational institution existing solely for educational purposes and not for purposes of profit would be exempt under section 10(23C)(iiiad) if the aggregate annual receipts of such university or educational institution do not exceed Rs. 1 Core.

Note:

W.e.f. Assessment Year 2022-23, the Finance Act, 2021 has increased the limit of aggregate annual receipts from Rs. 1 crore to Rs. 5 crore.

Section 10(23 C)(vi)

Income of 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) and which may be approved by the prescribed authority. An application in the prescribed form and manner has to be made to the Principal Commissioner or Commissioner, for grant of approval.

Income of Hospital [Section 10(23C)(iiiac)/(iiiae)/(via)]

Income arises to any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, shall be exempt from tax under following situations:

1) If the hospital or other institution is wholly or substantially financed by the Government then exemption would be available under section 10(23C)(iiiac).

2) If the aggregate annual receipt of such hospital or institution do not exceed Rs. 1 Crore then exemption would be available under section 10(23C)(iiiae).

Note:

W.e.f. Assessment Year 2022-23, the Finance Act, 2021 has increased the limit of aggregate annual receipts from Rs. 1 crore to Rs. 5 crore.

3) If the hospital is approved by the prescribed authority. An application in the prescribed form and manner has to be made to the Principal Commissioner or Commissioner, for grant of approval.

Receipt from university/institution/hospital referred in section 10(23C)(iiiad) and section 10(23C)(iiiae)

If the person has receipts from university or universities or educational institution or institutions as referred to in section 10(23C)(iiiad), as well as from hospital or hospitals or institution or institutions as referred to in section 10(23C)(iiiae), the exemptions under these clauses shall not apply, if the aggregate of annual receipts of the person from such university or universities or educational institution or institutions or hospital or hospitals or institution or institutions, exceed Rs. 5 crore.

Income of Charitable Institution or Fund [Section 10(23C)(iv)]

Any income of a charitable institution or fund which is approved by the prescribed authority having regard to its objects and its importance throughout India or throughout any State or States is exempt from tax.

An application in the prescribed form and manner has to be made to the Principal Commissioner or Commissioner, for grant of approval.

The Finance Act, 2020 has inserted an Explanation to the Third Proviso to Section 10(23C) to clarify that the corpus donations shall not form part of the income of charitable institutions or funds. It has been provided that any corpus donations received by such fund or institution or any university or other educational institution or any hospital or other medical institution, shall not be included in the income of such entities.

Income of religious/charitable trust [Section 10(23 C)(v)]

Income of any trust (including any other legal obligation) or institution formed wholly for public religious purposes or wholly for public religious and charitable purposes, which is approved by the prescribed authority having regard to the manner in which the affairs of the trust or institution are administered and supervised for ensuring that the income accruing thereto is properly applied for the objects thereof, is exempt from tax.

An application in the prescribed form and manner has to be made to the Principal Commissioner or Commissioner, for grant of approval.

The Finance Act, 2020 has inserted an Explanation to the Third Proviso to Section 10(23C) to clarify that the corpus donations shall not form part of the income of charitable institutions or funds. It has been provided that any corpus donations received by such fund or institution or any university or other educational institution or any hospital or other medical institution, shall not be included in the income of such entities.

The Finance Act, 2021 has further amended the explanation to provide that voluntary contributions made with a specific direction that it shall form part of the corpus shall be invested or deposited in one or more of the forms or modes specified in Section 11(5) maintained specifically for such corpus.

Conditions for claiming exemption under section 10(23C)(iv)/(v)/(vi)/(via)

In order to claim exemption under section 10(23C)(iv)/(v)/(vi)/(via), the fund or trust or institution or any university or other educational institution or any hospital or other medical institution, as the case may be, had to comply with the following conditions:

  1. An application in the prescribed form and manner has to be made to the Principal Commissioner or Commissioner, for grant of approval within the prescribed time limits. Timelines to make an application for approval has been summarised in the below table:
S. No. Category Time limit for making application
i. If entity is approved on or before 31-03- 2021 On or before 30-06-2021
ii. If entity is approved and the period of such approval is due to expire At least 6 months prior to expiry of said period
iii. If entity has been provisionally approved Earlier of the following:

·         At least 6 months prior to expiry of the period of the provisional approval; or

·         Within 6 months of commencement of its activities.

iv. In any other case At least 1 month prior to commencement of the previous year relevant to the assessment year from which said approval is sought
  1. On receipt of application for grant of approval, the Principal Commissioner or Commissioner is required to pass an order granting approval within the following period:
Passing of order by CIT or PCIT
If entity is approved on or before 31-03-2021 Within 3 months calculated from end of month in which application is received
If entity is approved and the period of such approval is due to expire Within 6 months calculated from end of month in which application is received
If entity has been provisionally approved Within 6 months calculated from end of month in which application is received
In any other case Within 1 months calculated from end of month in which application is received
  1. Where application is made by an assessee (already approved for exemption) for renewal of approval or by an assessee which is provisionally approved for exemption, the Principal Commissioner or Commissioner may call for such documents or information or make such inquiries as he thinks necessary in order to satisfy himself about:
  2. a) The genuineness of activities of assessee; and
  3. b) The compliance of such requirements of any other law for the time being in force by it as are material for the purpose of achieving its objects.

If he is not satisfied about the genuineness of activities and compliance required he may pass an order rejecting the application and cancelling its approval. However, he is required to grant an opportunity of being heard to the assessee.

  1. It should apply its income, or accumulates it for application, wholly and exclusively to the objects for which it is established and, in a case, where more than fifteen per cent of its income is accumulated on or after the 1st day of April, 2002, the period of the accumulation of the amount exceeding fifteen per cent of its income shall in no case exceed five year.
  2. Funds should not be invested or deposited for any period during the previous year otherwise than in any one or more of the forms/modes specified in section 11(5). However, this condition is not applicable in respect of the following:-

(i) any assets which form part of the corpus of the fund, trust or institution or any university or other educational institution or any hospital or other medical institution as on the 1st day of June, 1973;

(ii) Equity shares of a public company, held by any university or other educational institution or any hospital or other medical institution where such equity shares form part of the corpus of any university or other educational institution or any hospital or other medical institution as on the 1st day of June, 1998

(iii) Debentures of a company acquired by the fund, trust or institution or any university or other educational institution or any hospital or other medical institution before the 1st day of March, 1983;

(iv) any accretion to the shares, forming part of the corpus of the fund mentioned in point no. (i) and (ii), by way of bonus shares allotted to the fund, trust or institution or any university or other educational institution or any hospital or other medical institution;

(v) voluntary contributions received and maintained in the form of jewellery, furniture or any other article as the Board may, by notification in the Official Gazette, specify,s;

  1. Application out of corpus shall not be considered as an application for charitable or religious purposes. However, when it is invested or deposited back, into one or more of the forms or modes specified in Section 11(5) maintained specifically for such corpus from the income of the previous year, such amount shall be allowed as an application in the previous year in which it is deposited back to the corpus to the extent of such deposit or investment.
  2. Application from loans and borrowings shall not be considered as an application for charitable or religious purposes. However, when loan or borrowing is repaid from the income of the previous year, such repayment shall be allowed as an application in the previous year in which it is repaid to the extent of such repayment.
  3. For claiming exemption under section 10(23C)(iv) and (v), the fund, trust or institution, as the case may be, should disinvest by March 30, 1993, all the investment made before April 1, 1989, otherwise than in any one or more of the forms or modes specified in section 11(5).
  4. For claiming exemption under section 10(23C)(vi) and (via), the university or other educational institution or any hospital or other medical institution, as the case may be, should disinvest by March 30, 2001, all the investment made before June 1, 1998, otherwise than in any one or more of the forms or modes specified in section 11(5).
  5. If taxable income [before giving exemption under section 10(23C)] exceeds the exemption limit, the institution should get books of account audited in Form No. 10BB and audit report should be furnished one month prior to the due date for furnishing the return of income.

Note:

  • For the purpose of claiming exemption under section 10(23C), where any income is required to be applied or accumulated, then, for such purpose the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this clause in the same or any other previous year.
  • If tax is deductible from any payment but it is not deducted and payment is made to a resident person, 30% of such payment will be disallowed. In other words, only 70% of an expense shall be deemed as application of income if tax is not deducted from such payment in accordance with Chapter XVII-B. The disallowance shall be made in accordance with Section 40(a)(ia).
  • The Finance Act, 2018 has extended the provisions of Section 40A(3) and 40A(3A) mutatis mutandis to the institutions approved under section 10(23C)(iv)/(v)/(vi)/(via)]. Consequently, if payment for an expense exceeding Rs. 10,000 is made in any mode other than account payee cheque, bank draft, net banking (i.e., payment in cash or bearer cheque) that payment or expense will not be considered while computing the application of income.
  • Any donation given by a trust/institution [registered under section 12AA/12AB or referred to in section 10(23C)(iv)/(v)/(vi)/(via)] to any other trust [which is registered under section 12AA or referred to in section 10(23C)(iv)/(v)/(vi)/(via)] as contribution with specific direction that they shall form part of the corpus of the recipient trust/institution, shall not be treated as an application of income.

· No set-off or deduction or allowance of any excess application, of any of the year preceding the previous year, shall be allowed during the previous year. Therefore, the charitable trusts shall not be permitted to carry forward the losses or excess application of earlier years.

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