Do you know that educational institutions like colleges, schools and medical institutions like hospitals are not liable to pay income tax or you can say that they are exempted from Income Tax?

But this is not in all cases…

There are a threshold limit and certain specified conditions to be fulfilled to achieve the exemption from Income Tax in India. You might be curious to know these threshold/conditions if you are running a school or college or thinking to start one.

Boosting education and health infrastructure in a developing nation like India is very important goal of the Government and thus, the Government supports educational and medical institutions in many ways like allotting land at cheaper prices, exemptions in GST, tax exemptions under Income Tax etc. Exemptions from Income Tax are given to such institutions by the new Income Tax Act, 2025.

For extending income tax exemptions to educational and medical institutions, these institutions have been covered under Schedule VII of the Income Tax Act, 2025 “Person Exempt from Tax”. For this purpose, we have categorized the eligible institutions into two categories:

Notes:

Serial No. 17 & 18 of Schedule-VII:

If any educational or medical institution is wholly or substantially financed by the Government (Central/ State), its total income shall be exempted from income tax without any threshold limit. However, it is important to check that it is formed solely for educational purpose or health purposes respectively. We need to check their incorporation instrument for this and identify the objects for which the institution is registered.

While incorporating a new such institution, utmost care should be taken at the time of deciding its objects so that no undesirable object forms part of its constitution leading to disablement of the income tax exemption. The words “Solely” in the Table-17 suggests that if an educational institution is formed, all objects should be mainly towards education or objectives ancillary to it.

What does “Substantially financed by Government” mean?

Serial No. 17 & 18 of Schedule VII provides exemption for educational and medical institutions wholly or substantially financed by Government. So, it is important to know the meaning of the word “substantially”.

According to Rule 287, an institution is deemed to be substantially financed by the Government for any tax year if the Government grant received during that year exceeds 50% of its total receipts (including donations). Therefore, to qualify for exemption in this category, the educational or medical institution need to check that more than 50% of their total receipts comes from the Government.

Key Principles for ₹ 5 Crore Threshold [Sr. No. 19 of Schedule VII]

• Exemption without Mandatory Registration: Educational and medical institutions with aggregate annual receipts up to ₹ 5 crores can claim full tax exemption under Schedule VII without requirement of mandatory registration under Section 332.

• The ₹ 5 Crore limit applies per taxpayer, not per institution or activity. If a single entity or trust operates multiple units (e.g. an educational institution with ₹ 3 crore receipts and a hospital with ₹ 4 crore receipts), the combined receipt of ₹ 7 crores exceeds the threshold, making the entity ineligible for exemption from Income tax under Sr. No. 19 of Schedule VII.

• Anonymous Donation:

• If an exempt educational or medical institution under this category receives anonymous donation, it shall be taxable as per Section 337.
• According to this section, the portion of anonymous donation exceeding the higher of ₹ 1,00,000 or 5% of total donations is treated as “specified income” and taxed at 30%.

• Although the total income of these institutions is already exempt from income tax, if they wish to enable donors to claim deductions under section 133(1)(b)(ii) [Earlier known as 80G], they must register as “Registered Non-Profit Organization” (RNPO) under section 332 and obtain approval under section 354.

Practical Checklist for Educational and Medical Institutions

• Review the institution’s trust deed, memorandum, statute or other incorporation document and check that its objects match the relevant exemption category.
• Identify the applicable Schedule VII entry and retain the basis for claiming exemption.
• Check annual receipts and aggregation rules where the ₹5 crore threshold applies.
• For Government-financed institutions, retain Government grant letters and records supporting the substantial-financing calculation.
• Maintain books of account, donation records and donor particulars, including information relevant to anonymous donations.
• Consider registration and approval separately for the institution’s own tax treatment and for donor deductions.
• Verify the current Act, Rules and relevant forms for the tax year before filing or advising the institution.

Conclusion

Educational and medical institutions in India may qualify for income-tax exemption, but the conditions depend on the category under which the institution falls. Government financing, the institution’s objects, the ₹5 crore annual receipts threshold, anonymous donations and donor deduction approvals are important points to review.

If you run or plan to establish a school, college, university, hospital or other eligible institution, review the relevant provisions and supporting documents carefully before taking a position on exemption.

About the Author

Written by a Chartered Accountant in practice. For professional assistance with taxation and compliance, visit TaxWink: https://taxwink.com. [Written by CA Naveen Goyal, Practising Chartered Accountant contact: taxwink.care@gmail.com]