Section 10(23D) of the Income Tax Act offers tax exemption to organisations involved in activities like education, medical relief, and charity. However, to qualify for this exemption, the organisation must operate without the intention of making a profit and be officially registered as a trust, society, or similar entity. Also, it must use its earnings only for the purposes for which it was established, like education or medical relief.
This tax exemption helps such organisations use more resources for their charitable activities instead of paying taxes. Let’s understand some key provisions of Section 10(23D) and study in detail the various conditions to be met for claiming exemptions.
What is Section 10(23D) of the Income Tax Act?
Section 10(23D) of the Income Tax Act provides tax exemptions to organisations engaged in activities such as:
- Education
- Medical relief, and
- Charity
To qualify for this exemption, these organisations must operate on a non-profit basis and be registered as a trust, society, or similar entity. Additionally, they must use their earnings solely for the purposes for which they were established, such as:
- Providing education
- Offering medical relief
- Engaging in charitable activities
By reducing the tax burden, Section 10(23D) encourages and supports the growth of non-profit entities that work for the welfare of society.
Also read: Income Tax Slabs for FY 24-25
Entities covered under Section 10(23D)
Section 10(23D) of the Income Tax Act provides tax exemptions to various types of organisations involved in specific activities. Let’s have a look at some main types of entities covered:
Educational institutions
The entities covered under this category are:
- Schools
- Colleges, and
- Universities
These establishments must be recognised by the government and operate on a not-for-profit basis.
Hospitals
This category includes:
- Hospitals
- Medical colleges, and
- Similar institutions focused on treating illnesses or injuries
Charitable institutions
This includes trusts, organisations, or institutions set up for charitable purposes like:
- Helping the poor
- Providing education, or
- Offering medical relief
Also read: Income tax return extended date for AY 2024-25
Conditions to claim an exemption under Section 10(23D)
To get a tax exemption under Section 10(23D) of the Income Tax Act, an entity must meet the following conditions:
The entity must be engaged in specific activities
The entity must be involved in activities like education, medical relief, or charitable purposes.
The entity must be a not-for-profit entity
The entity must not aim to make a profit. It should operate with a welfare motive and solely for the public good.
The entity must be registered
The entity must be officially registered under relevant laws, such as:
- The Societies Registration Act
- The Trusts Act, or
- The Companies Act
The entity must maintain books of accounts
The entity must keep accurate financial records and have them audited by a chartered accountant.
The income of the entity must be applied for the specified purposes
The money earned by the entity must be used only for the specific purposes it was set up for, like education, charity, or medical relief.
Also read: Direct Tax Code 2025
Benefits of Section 10(23D)
Entities that qualify for this exemption do not have to pay income tax on their earnings. Such an exemption allows these organisations to better use their resources to achieve their goals, whether it is educating students, treating patients, or supporting charitable causes.
Also, this tax exemption encourages the creation of new entities focused on:
- Education
- Healthcare, and
- Charity
That’s because “no tax liability” makes it easier for them to operate financially. Moreover, even existing entities can grow due to the financial relief provided by tax exemptions. It allows them to expand their services and reach more people.
Also read: Section 112A of Income Tax Act
Scope of activities
Section 10(23D) of the Income Tax Act covers a wide range of activities. This primarily includes:
- Educational institutions, such as universities, colleges, and schools, as long as they provide education and do not operate for profit.
- Medical institutions like hospitals and medical colleges if they are solely involved in treating illnesses or injuries.
- Charitable institutions that are established for purposes such as:
- Helping the poor
- Providing education
- Offering medical relief
Conditions for exemption
To make sure that organisations operate transparently and genuinely focus on their intended public service activities, Section 10(23D) of the Income Tax Act has laid out several conditions that must be met to qualify for tax exemption. These are:
Registration
The organisation must be officially registered under the relevant law, such as the Societies Registration Act, the Trusts Act, or the Companies Act.
Maintain books of accounts
The organisation must keep accurate financial records of all its transactions.
Audited accounts
These financial records must be reviewed and verified by a chartered accountant.
Use of income
The income the organisation earns must be used only for the specific purposes it was established for, such as education, medical relief, or charity.
Not-for-profit
The organisation must not be established to make a profit. Any income it earns should not be for personal or private gain.
Also read: Hindu Undivided Family Act
Exemption limits
It is worth mentioning that there is no maximum limit on the amount of income that can be exempt from tax under Section 10(23D). However, this tax exemption only applies to income earned from the specific activities for which the organisation was established. Any income from other sources will be taxed according to the usual tax rates.
Apart from Section 10(23D), there are several other provisions as well that offer exemptions to organisations operating with a welfare motive. These are:
- Section 11: Provides tax exemption to charitable and religious trusts if they use their income for charitable purposes.
- Section 12A: Offers registration to charitable organisations, which consequently makes them eligible for various tax benefits.
However, it must be noted that even if an organisation qualifies for an exemption under Section 10(23D), it still must:
- File an income tax return
- Maintain proper books of accounts
- Have its accounts audited by a chartered accountant
- Submit the audit report along with the income tax return
Moreover, recently, the government has taken steps to ensure that organisations claiming tax exemption under Section 10(23D) are following the rules. These measures include:
- Compliance checks that ensure entities meet the conditions for exemption
and - Transparency requirements which need such entities to disclose their sources of funding and how they are using their income.
Also read: Section 111A of Income Tax Act
Conclusion
Section 10(23D) of the Income Tax Act exempts the income earned by non-profit organisations engaged in education, medical relief, and charity. By removing the tax burden, this section allows these entities to channel more resources into their intended activities and enhance their societal impact.
However, to qualify, organisations must be registered under the applicable laws, maintain books of accounts, and have them audited by a chartered accountant. They must also use their income solely for their specified purposes. Recently, to ensure better compliance, the government has issued some transparency requirements for such entities. Now, they are required to disclose the sources of their funding and how they are using them.
