Good morning to all the members of ASISC attending the Program today; My

name is Gurpreet Kaur and I am a chartered accountant practicing in Ranchi,

Jharkhand.

Topics for today’s discussion are:

1. Requirement of Section 11 and Section 12 of the Income Tax Act,

(Applicable to Trust / Societies / Educational Institutions etc.) (along
with latest developments in the present budget).
2. Understanding GST provisions relevant for schools.
3. ICAI’s guidelines on accounting and auditing of the schools and latest
guidelines with respect to presentation of accounts.
4. Provision of TDS, Restriction on cash expenses and other relevant
matter pertaining to the school.
5. Interactive sessions and clearing doubts etc.

For the purpose of this Seminar, I will use the terminology ‘educational
institution’ to represent an organization with all three possible legal structure
-

a. A Society registered under the Societies Registration Act, 1860 or;

b. A Trust or;
c. A Company registered under Section 8 of The Companies Act 2013,

Which is registered under section 10(23C) and Section 12 of the Income Tax
Act, with educational objects.
 Requirement of Section 11 and Section 12 of the Income Tax
Act, (Applicable to Trust / Societies / Educational Institutions
etc.) (along with latest developments in the present budget).

For the purpose of claiming exemption from Income Tax:

1. Section: 10(23C)

Section 10(23C)

Government Educational
Non Governemnt
Institution Section
Educational Institution
10(23C)(iiiab)

Existing Solely for Section 10(23C)(iiiad), Section 10(23C)(vi)

Education Purpose, Gross Receipt < 5 Crore, Gross Receipt > 5 Crore,
wholly or substantially existing solely for existing solely for
financed by the govt, no educational purpose, no educational purposes,
seperate approval sperate approval approval required from
required required authority

Becomes redundent w.e.f

01.10.2024; no new
applicaions will be
processed under this
section and all
registrations and re-
registration will be done
only under section 12AB

In other words, new registrations under Section 10(23C) with a validity of five
years can be issued until 31-03-2025. Therefore, the sunset timeline for all
organizations approved under these sub-clauses will be the AY 2029-30.

All the terms and conditions as applicable to Section 11 and 12 has

been applied mutatis mutandis to educational institutions covered
under Section 10(23C)(vi) w.e.f. 01.04.2021
2. Section 11 specifies conditions for availing exemptions under section
12:
 Application of income should be in India
 Applications include capital and well as revenue expenditures;
Depreciation is not a part of application of income;
 Any sum payable by a trust is considered an application of income
in the year it's actually paid, regardless of when the liability was
incurred. However, a sum claimed as applied in one year cannot be
claimed as an application in a subsequent year.
 Upto 15% of the income can be accumulated.
 Voluntary contributions specifically forming part of the trust's corpus
are exempt, provided they are invested in specified forms.
 If less than 85% of the income from the trust property is applied to
charitable/religious purposes in India due to non-receipt of income
or other reasons, the unapplied amount can be deemed applied in a
subsequent year under certain conditions. (Form 9)
 Any amount credited or paid from the income (as per clauses (a) or
(b) of sub-section (1)) to certain other trusts or institutions as a
corpus contribution will not be treated as an application of income
for charitable or religious purposes.
 Application of income from the corpus or from loans/borrowings is
generally not treated as application of income for
charitable/religious purposes, unless the amount is
reinvested/repaid from the current year's income within five years
and certain conditions are met.
 When a capital asset held by a trust for charitable/religious
purposes is transferred, and the net consideration is used to acquire
another similar capital asset, the capital gain is deemed to have
been applied for charitable/religious purposes to the extent
specified.

Accumulation of Income:

 If 85% of the income is not applied, but accumulated or set apart for
charitable/religious purposes in India, it won't be included in total
income if certain conditions are met: the unapplied part can be
accumulated and set apart for utilization within upcoming 5 years.
 A statement must be furnished to the Assessing Officer stating the
purpose and period of accumulation (not exceeding five years)
(Form 10).
 The accumulated money must be invested in specified forms.
 The statement must be furnished at least two months prior to the
due date for filing the return of income.
 Any amount credited or paid out of accumulated income to other
registered trusts or institutions will not be treated as an application
of income.

Deemed Income from Accumulated Funds:

 Accumulated income becomes taxable in the previous year if it is:

 Applied to non-charitable/religious purposes or ceases to be
accumulated.
 No longer invested in the specified forms.
 Not utilized for the stated purpose within the accumulation period.
 Credited or paid to certain other trusts or institutions.
 In circumstances beyond the control of the recipient, the Assessing
Officer may allow the accumulated income to be applied for another
charitable/religious purpose consistent with the trust's objects. This
also applies if the trust is dissolved.

Business Undertakings and Accounting:

 "Property held under trust" includes a business undertaking. If a

claim is made for income exemption from such an undertaking, the
Assessing Officer can determine the income, and any excess over
the shown accounts will be deemed applied for
non-charitable/religious purposes.
 Exemptions under sub-sections (1), (2), (3), or (3A) do not apply to
business profits unless the business is incidental to the trust's
objectives and separate books of account are maintained.

Forms and Modes of Investment:

 The document specifies various forms and modes for investing or

depositing accumulated funds, including savings certificates, Post
Office Savings Bank accounts, scheduled banks, Unit Trust of India,
government securities, guaranteed debentures, public sector
companies, and certain financial corporations.
 Investment in immovable property is also an option, with a
clarification that it excludes machinery or plant.
 Depreciation and Registration:

 Income required to be applied or accumulated is determined

without deduction for depreciation if the asset's acquisition was
claimed as an application of income.
 If a trust or institution is registered under Section 12AA or 12AB (or
12A previously), generally no other clauses of Section 10 (with
specific exceptions) will exclude income from its total income.
 Such registration becomes inoperative if the trust is approved or
notified under certain clauses of Section 10(23C), 10(23EA),
10(23EC), 10(23ED), 10(46), 10(46A), or 10(46B). A trust can apply
to make its 12AA/12AB registration operative again, but its approval
under the other Section 10 clauses will cease.

Let's break down Section 12 of the Income Tax Act, which deals with
how contributions (donations) received by charitable and religious
trusts and institutions are treated for tax purposes.

This section essentially clarifies what counts as "income" from

donations and, importantly, highlights situations where even
donations might become taxable.

Simplified Explanation of Section 12: Income from Contributions

1. General Rule: Voluntary Contributions are Income (for Exemption

Purposes)

 When a charitable or religious trust or institution receives voluntary

contributions (donations), these are generally considered income
derived from the property it holds for its charitable/religious purposes.

 This is important because it means these donations, along with other

income, can qualify for tax exemption under Section 11, provided the
trust meets all the conditions of Section 11 and doesn't fall foul of
Section 13 (which lists situations where exemptions are denied).

 Exception: If a donation is specifically given with a clear instruction

that it should be part of the corpus (the permanent capital) of the
 trust/institution, then it's not treated as regular income for the purpose
of application/expenditure rules. Corpus donations are generally
exempt from income tax when received, but their use is restricted.

2. Services Provided to "Insiders" are Taxable Income:

 This is a crucial point to prevent misuse. If a charitable or religious

trust runs a hospital, medical institution, or educational institution, and
it provides medical or educational services (like free treatment,
subsidized education, etc.) to certain "prohibited persons" (as defined
in Section 13(3) – these are usually founders, trustees, substantial
contributors, their relatives, or related businesses), then:

o The value of those services (calculated as the benefit or facility

provided free or at a concessional rate) will be considered
income of the trust.

o This income will be taxable, even if Section 11 would otherwise

grant an exemption.

o In simpler terms: Charities can't give special freebies or heavily

discounted services to their founders, trustees, or large donors
and still claim full tax exemption. The value of those benefits will
be added to their taxable income.

3. Misuse of Specific Disaster Relief Donations is Taxable:

 This sub-section deals with a very specific scenario related to

donations received for the Gujarat earthquake relief (pre-2004).

 If a trust received donations specifically for this purpose under Section

80G(2)(d) and:

o They didn't provide proper accounts of how the money was used
to the authorities.

o They used the money for purposes other than Gujarat

earthquake relief.

o They didn't utilize the funds by a specific date (March 31, 2004)
and didn't transfer the unutilized amount to the Prime Minister's
National Relief Fund.

 In such cases, the misused or unutilized donation amount would be

deemed as income of that year and would be charged to tax.
In essence, Section 12 ensures that:

 Most voluntary contributions are treated as income that can be

exempted if used properly for charitable/religious purposes.

 Charities cannot provide undue benefits to their founders, trustees, or

significant donors through free or subsidized services without losing
their tax exemption on the value of those benefits.

 Donations received for specific public relief (like disaster aid) must be
used for their intended purpose and accounted for properly, or they will
become taxable.

Section 12A of the Income Tax Act lays down the fundamental conditions that
a charitable or religious trust or institution must meet to qualify for tax
exemptions on its income under Sections 11 and 12.

Conditions for Tax Exemption (Sections 11 & 12)

Your trust or institution will NOT get tax exemption on its income unless it
fulfills the following main requirements:

1. Proper Registration is a Must:

 You must apply for and get registered with the Income Tax Department.
The specific rules for application and registration have changed over
time:

o Recent Mandatory Re-registration/Fresh Registration (post-2020

amendments): This is a critical set of new rules for all trusts,
regardless of when they were formed or initially registered. You
must apply for re-registration or fresh registration under Section
12AB (the new process) in specific situations and within strict
deadlines:

 If already registered under old Sections 12A/12AA: You had

to apply for re-registration within 3 months from April 1,
2021 (i.e., by June 30, 2021).

 If your current 12AB/10(23C) approval is expiring: You must

apply for renewal at least 6 months before it expires.
  If you have provisional registration/approval: You must
apply for regular registration/approval at least 6 months
before the provisional period ends, or within 6 months of
starting your activities, whichever is earlier.

 If your registration became inactive: You must apply at

least 6 months before the assessment year from which you
want it to be active again.

 If you change your objectives: If your trust changes its

goals in a way that doesn't fit its existing registration, you
must apply for fresh registration within 30 days of that
change.

 For all other cases (e.g., brand new trusts with no income
yet, or existing trusts that haven't claimed exemptions
before): Specific timelines apply based on whether your
activities have started or not.

o Can delay be excused? Yes, if you miss these new deadlines, the
tax commissioner can excuse the delay if there's a "reasonable
cause" and treat your application as if it was filed on time.

2. Proper Books of Account and Audit (for larger trusts):

 If your total income (calculated before applying any tax exemptions

under Sections 11 and 12) in any year exceeds the maximum amount
that's not taxable for an individual (which changes over time, e.g., the
basic exemption limit), then:

o You must keep proper books of account and other documents in

the prescribed way and place.

o Your accounts for that year must be audited by a qualified

accountant by the specified deadline (like the due date for filing
tax returns).

o You must submit the audit report in the prescribed form by that
deadline.

3. Timely Filing of Income Tax Return:

 You must file your income tax return for the previous year by the due
date specified in the law (usually July 31st for trusts not requiring audit,
 or September 30th for audited trusts, but check specific dates for your
scenario).

When the Exemptions Start (After Registration):

 Generally, if you apply on or after June 1, 2007, the tax exemptions

under Sections 11 and 12 apply from the financial year after you make
the application.

 Important exceptions for recent changes:

o If you re-register under the new mandatory process (due to old

registration), your exemption will be valid from the original
assessment year your trust was first registered.

o If you apply after being provisionally registered, your exemption

will be valid from the assessment year you were provisionally
registered for.

In simple terms: Section 12A is the rulebook for charitable trusts and
institutions to get and keep their tax-exempt status. It primarily demands
proper and timely registration (with specific new mandatory re-registration
rules), proper accounting and auditing if your income is above a basic limit,
and filing your tax returns on time. Failure to meet these conditions means
your income will become taxable.

Section 11(5): The forms and modes of investing or depositing the money
referred to in clause (b) of sub-section (2) shall be the following, namely :—

(i) investment in savings certificates as defined in clause (c) of section 2

of the Government Savings Certificates Act, 1959 (46 of 1959), and
any other securities or certificates issued by the Central Government
under the Small Savings Schemes of that Government;

(ii) deposit in any account with the Post Office Savings Bank;

(iii) deposit in any account with a scheduled bank or a co-operative

society engaged in carrying on the business of banking (including a
co-operative land mortgage bank or a co-operative land development
 bank).

Explanation.—In this clause, "scheduled bank" means the State Bank

of India constituted under the State Bank of India Act, 1955 (23 of
1955), a subsidiary bank as defined in the State Bank of India
(Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank
constituted under section 3 of the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section
3 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank
included in the Second Schedule to the Reserve Bank of India Act,
1934 (2 of 1934);

(iv) investment in units of the Unit Trust of India established under the
Unit Trust of India Act, 1963 (52 of 1963);

(v) investment in any security for money created and issued by the
Central Government or a State Government;

(vi) investment in debentures issued by, or on behalf of, any company or

corporation both the principal whereof and the interest whereon are
fully and unconditionally guaranteed by the Central Government or
by a State Government;

(vii) investment or deposit in any public sector company:

Provided that where an investment or deposit in any public sector

company has been made and such public sector company ceases to
be a public sector company,—

(A) such investment made in the shares of such company shall be

deemed to be an investment made under this clause for a
period of three years from the date on which such public
sector company ceases to be a public sector company;

(B) such other investment or deposit shall be deemed to be an

investment or deposit made under this clause for the period
up to the date on which such investment or deposit becomes
repayable by such company;

(viii) deposits with or investment in any bonds issued by a financial

corporation which is engaged in providing long-term finance for
industrial development in India and which is eligible for deduction
 under clause (viii) of sub-section (1) of section 36;

(ix) deposits with or investment in any bonds issued by a public company

formed and registered in India with the main object of carrying on the
business of providing long-term finance for construction or purchase
of houses in India for residential purposes and which is eligible for
deduction under clause (viii) of sub-section (1) of section 36;

(ixa) deposits with or investment in any bonds issued by a public company

formed and registered in India with the main object of carrying on the
business of providing long-term finance for urban infrastructure in
India.

Explanation.—For the purposes of this clause,—

(a) "long-term finance" means any loan or advance where the

terms under which moneys are loaned or advanced provide for
repayment along with interest thereof during a period of not
less than five years;

(b) "public company" shall have the meaning assigned to it in

section 3 of the Companies Act, 1956 (1 of 1956);

(c) "urban infrastructure" means a project for providing potable

water supply, sanitation and sewerage, drainage, solid waste
management, roads, bridges and flyovers or urban transport;

(x) investment in immovable property.

Explanation.—"Immovable property" does not include any machinery

or plant (other than machinery or plant installed in a building for the
convenient occupation of the building) even though attached to, or
permanently fastened to, anything attached to the earth;

(xi) deposits with the Industrial Development Bank of India established

under the Industrial Development Bank of India Act, 1964 (18 of
1964);

(xii) any other form or mode of investment or deposit as may be

prescribed.
Forms or modes of investment or deposits by a charitable or religious trust or
institution.

Rule: 17C. The forms and modes of investment or deposits under clause (xii)
of sub-section (5) of section 11 shall be the following, namely :—

(i) investment in the units issued under any scheme of the mutual fund
referred to in clause (23D) of section 10 of the Income-tax Act, 1961;

(ii) any transfer of deposits to the Public Account of India;

(iii) deposits made with an authority constituted in India by or under any

law enacted either for the purpose of dealing with and satisfying the
need for housing accommodation or for the purpose of planning,
development or improvement of cities, towns and villages, or for
both;

(iv) investment by way of acquiring equity shares of a depository as

defined in clause (e) of sub-section (1) of section 2 of the
Depositories Act, 1996 (22 of 1996);

(v) investment made by a recognised stock exchange referred to in

clause (f) of section 2 of the Securities Contracts (Regulation) Act,
1956 (42 of 1956) (hereafter referred to as investor) in the equity
share capital of a company (hereafter referred to as investee)—

(A) which is engaged in dealing with securities or mainly

associated with the securities market;

(B) whose main object is to acquire the membership of another

recognised stock exchange for the sole purpose of facilitating
the members of the investor to trade on the said stock
exchange through the investee in accordance with the
directions or guidelines issued under the Securities and
Exchange Board of India Act, 1992 (15 of 1992) by the
Securities and Exchange Board of India established under
section 3 of that Act; and

(C) in which at least fifty-one per cent of equity shares are held by
the investor and the balance equity shares are held by
 members of such investor;
58
[(va investment made by a person, authorised under section 4 of the
) Payment and Settlement Systems Act, 2007, in the equity share
capital or bonds or debentures of a company—

(A) which is engaged in operations of retail payments system or

digital payments settlement or similar activities in India and
abroad and is approved by the Reserve Bank of India for this
purpose; and

(B) in which at least fifty-one per cent of equity shares are held by
National Payments Corporation of India;]
59
[(vb investment made by a person, authorised under section 4 of the
) Payment and Settlement Systems Act, 2007 (51 of 2007), in the
equity share capital or bonds or debentures of Open Network for
Digital Commerce Ltd., being a company incorporated under sub-
section (2) of section 7 read with sub-section (1) of section 8 of the
Companies Act, 2013 (18 of 2013), for participating in network based
open protocol models which enable digital commerce and
interoperable digital payments in India;]

(vi) investment by way of acquiring equity shares of an incubatee by an

incubator.

Explanation.—For the purposes of this clause,—

(a) "incubatee" shall mean such incubatee as may be notified by

the Government of India in the Ministry of Science and
Technology;

(b) "incubator" shall mean such Technology Business Incubator or

Science and Technology Entrepreneurship Park as may be
notified by the Government of India in the Ministry of Science
and Technology;

(vii) investment by way of acquiring shares of National Skill Development

Corporation;

(viii) investment in debt instruments issued by any infrastructure Finance

Company registered with the Reserve Bank of India;
60
[(ix) investment in "Stock Certificate" as defined in clause (c) of paragraph
 2 of the Sovereign Gold Bonds Scheme, 2015, published in the
Official Gazette vide notification number G.S.R. 827(E), dated the
30th October, 2015;]
61
[(x) investment by way of acquiring units of POWERGRID Infrastructure
Investment Trust.]

New Section (Budget 2025)

[Merger of charitable trusts or institutions in certain cases.

1

12AC. Where any trust or institution registered under section

12AB or approved under sub-clause (iv) or sub-clause (v) or sub-
clause (vi) or sub-clause (via) of clause (23C) of section 10, as the
case may be, merges with another trust or institution, the
provisions of Chapter XII-EB shall not apply if--

(a) the other trust or institution has same or similar objects;

(b) the other trust or institution is registered under section

12AA or section 12AB or approved under sub-clause (iv) or
sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause
(23C) of section 10, as the case may be; and

(c) the said merger fulfils such conditions as may be prescribed.]

This section (12AB) outlines the procedure for trusts and

institutions to get or renew their tax exemption registration from
the Income Tax Department in India. This registration is crucial for
them to claim tax benefits under Sections 11 and 12.

Process:

1. Applying for Registration (Based on the Type of Application):

  New Provisional Registration (for newly established trusts or
those applying for the first time):

o If you're applying for provisional registration, the tax

authorities (Principal Commissioner or Commissioner) will
generally grant it for three years.

o Form 10A

 Regular Registration (for existing trusts or those converting

provisional to final):

o For other types of applications (like converting a

provisional registration to a regular one, re-registration,
or renewing an expiring registration), the tax authorities
will first check a few things:

 Are your activities genuine? (Are you actually doing

what you say you are for charitable/religious
purposes?)

 Are you complying with other relevant laws? (e.g.,

laws related to your operations that are important
for your charitable objects).

o If they are satisfied, they will register your trust for five
years.

o However, if your total income (before claiming tax

exemptions) was less than 5 crore rupees in each of the
two previous years before applying, your registration will
be for TEN years instead of five. This is a special benefit
for smaller trusts.

o If they are not satisfied after their inquiry, they will reject
your application. For certain types of applications (like
converting provisional to final or re-registration), they
might also cancel any existing registration you had.
Before rejecting or cancelling, they must give you a
chance to explain your case.

2. Handling Old Pending Applications:

 Any applications that were waiting for a decision under the old
rules (Section 12AA) when these new rules (Section 12AB)
 came into effect will automatically be treated as if they were
new applications for provisional registration under these new
rules.

3. Time Limits for Decision:

 The tax authorities have specific deadlines to pass an order:

o 3 months for provisional registrations.

o 6 months for converting provisional to regular

registration, re-registration, or renewal after the first
regular registration.

o 1 month for applications related to initial provisional

registration (specifically mentioned for a certain sub-
clause).

4. Cancellation of Registration (Even After It's Granted):

 Even if you have a valid registration (provisional or regular),

the tax authorities can cancel it if they find certain "specified
violations." This can happen if:

o They notice violations on their own.

o They receive a report from a lower tax officer.

o Your case is selected for scrutiny based on their risk

assessment strategy.

 Before cancelling, they will again:

o Ask for documents/information or make inquiries to

confirm the violations.

o Give you a reasonable opportunity to be heard (a chance

to explain yourself).

 If they are satisfied that violations occurred, they will cancel

your registration for that year and all future years. If not, they
will refuse to cancel.

5. What are "Specified Violations" (Reasons for Cancellation)?

 Your income is used for purposes other than your trust's

charitable/religious objects.
  You have business income that's not directly related to your
main charitable goals, or you don't keep separate financial
records for such business.

 You apply income for private religious purposes that don't

benefit the public.

 A charitable trust created after the Act started uses its income
to benefit a specific religious community or caste (unless it's
for underprivileged groups like SC/ST, women, children).

 Your activities are not genuine or are not being carried out
according to your registration conditions.

 You haven't complied with other relevant laws, and that non-
compliance is confirmed (not disputed or final).

 Your application for registration contained false or incorrect

information.

In essence, Section 12AB outlines a structured process for

charitable and religious organizations to obtain and maintain their
tax-exempt status, emphasizing compliance with their stated
objectives and legal requirements, with provisions for scrutiny and
cancellation if deviations occur.

Here's a simpler way to understand those changes to tax

registration for charitable trusts and institutions:

Longer Registration for Smaller Charities:

 If a trust or charity's income (before any tax exemptions) was

less than 5 crore rupees in each of the two years before they
apply for registration, their registration under Section
12AA/12AB will now be valid for 10 years instead of the usual 5
years.

 When this starts: This 10-year benefit applies to applications

made after March 31, 2025.

 Doesn't apply to new trusts: This longer period doesn't apply

to brand new trusts getting their first-time provisional
registration; that still remains a 3-year period.
What about Existing Small Trusts?

 Even if a small trust's current approval is valid until March 31,

2026, they still need to apply for renewal by September 30,
2025.

 The good news is, if they qualify as a "small trust" (income

under 5 crores in the preceding two years), their renewal will
be for 10 years, not 5.

 Important note: This extended validity is for the general trust

registration. However, trusts and institutions still need to
renew their 80G registration every 5 years (this allows donors
to claim tax deductions).

Changes to Application Rejection/Cancellation:

 Less harsh rejections: Previously, if an application for renewal

or registration was incomplete, the tax commissioner could
just reject it outright.

 Now, cancellation/rejection by the commissioner will only

happen if the application contains false or incorrect
information. This makes the process a bit more forgiving for
minor errors.

Various Forms:

Form 10A/10AB – New Registration / Renewal of Registration

Form 10B /10BB– Audit Report

Form 10C – Certificate of Registration

Form 10D – Certificate of Cancellation

Section 13
Section 13 of the Income Tax Act outlines specific situations where the tax
exemptions generally available to charitable and religious trusts and
institutions under Sections 11 and 12 will not apply. This means their
income will become taxable. It essentially sets the conditions for losing the
tax-exempt status.

Key scenarios where exemptions are denied:

 Private Religious Trusts: Income from property held under a trust

for private religious purposes, which does not benefit the general
public.

 Discrimination by New Trusts: Income of charitable trusts or

institutions established after the commencement of the Act if they are
created for the exclusive benefit of a particular religious community or
caste (with an exception for Scheduled Castes, Backward Classes,
Scheduled Tribes, women, and children).

 Benefit to Prohibited Persons (Insiders/Related Parties): This is

a crucial denial. Exemption is lost if any income or property of the
trust/institution (whether new or old, with some exceptions for pre-
commencement trusts where compliance with mandatory terms is
involved) directly or indirectly benefits specific "prohibited persons."

o Prohibited persons include:

 The author/founder of the trust/institution.

 Any person whose total contribution to the trust/institution

exceeds INR 1 lakh in the relevant previous year or INR 10
lakh in aggregate up to the end of the previous year.

 Members of a Hindu Undivided Family if the author/founder

is an HUF.

 Trustees or managers of the institution.

 Relatives of any of the above.

 Any business concern in which any of the above persons

have a "substantial interest" (defined as 20% or more
voting power in a company or 20% or more share in profits
in other concerns).

o Examples of deemed benefit: Lending without adequate

security/interest, providing property without adequate rent,
 paying excessive salaries, providing services without adequate
compensation, purchasing/selling property at inflated/deflated
prices with prohibited persons, or diverting income/property
(above INR 1,000) to them.

 Improper Investments: Income is taxed if the trust/institution

invests or keeps its funds (after specified dates) in forms or modes
other than those prescribed in Section 11(5) (which lists approved
investment avenues like government securities, public sector
companies, etc.). There are certain exceptions for existing assets or
specific types of shares.

 Anonymous Donations (Reference to 115BBC): Any anonymous

donation on which tax is already payable under Section 115BBC will
not be exempt under Section 11 or 12.

 Violation of Commercial Activity Conditions (Reference to

Section 2(15)): If a charitable activity (as defined in Section 2(15))
involves a business activity exceeding certain turnover limits or is not
genuinely carried out for charitable purposes, the exemption may be
denied.

Section 2(15): When "General Public Utility" Isn't Charitable

There's a crucial catch for that last point ("any other activity that
benefits the general public"). If your organization runs a business
or commercial activity, or provides services for a fee that are
related to trade or business, that activity generally won't be
considered charitable, even if the income is used for
charitable purposes.

However, there are two exceptions where such a business

activity can still be considered part of a charitable purpose:

1. The business activity is directly related to and helps achieve

the "general public utility" goal.

2. The money earned from this business activity in a year

doesn't exceed 20% of the organization's total income for
that year.

 Failure to Furnish Returns/Statements: If the trust or institution

fails to file its income return or the required statement regarding
 accumulated income by the due dates, the exemption for that
accumulated income is denied.

 Consequences of Denial (Section 10 & 12A Violations): If

exemptions are denied due to certain violations (e.g., related to the
application process for registration or failure to apply income as
required), the taxable income will be computed after allowing
deductions for revenue expenditure incurred in India for the objects of
the trust, provided certain conditions are met (e.g., expenditure not
from corpus, not from loans, no depreciation claimed on assets already
claimed as application of income, not a donation to another person).
No other deductions or set-off of losses are allowed in this scenario.

In essence, Section 13 serves as a safeguard to ensure that tax benefits are

provided only to genuine charitable and religious activities and that the
assets and income of these institutions are not misused for private gain or
invested in non-approved avenues.

Other Relevant Sections:

Section 115BBC:

This section, 115BBC of the Income Tax Act, outlines the taxation of
anonymous donations received by certain charitable and educational
institutions in India.
Here's a summary:
 Tax on Anonymous Donations: If a specified institution (universities,
hospitals, funds, trusts, etc., eligible for exemptions under Section
10(23C) or Section 11) receives anonymous donations, a portion of
these donations will be taxed at a higher rate.
 Taxable Amount: The tax will be levied at 30% on anonymous
donations that exceed the higher of:
o 5% of the total donations received by the institution, OR
o INR 100,000.
o The remaining income of the institution will be taxed as usual,
after reducing the excess anonymous donations.
  Exemptions: This special tax on anonymous donations does not
apply to:
o Trusts or institutions established wholly for religious
purposes.
o Trusts or institutions established wholly for religious and
charitable purposes, unless the anonymous donation is
specifically directed towards a university, educational institution,
hospital, or medical institution run by them.
 Definition of Anonymous Donation: An "anonymous donation" is
defined as a voluntary contribution where the recipient does not keep a
record of the donor's identity (name, address, and other prescribed
particulars).

Section 115BBI:

This section, 115BBI, deals with the taxation of "specified income"

for certain charitable and educational institutions in India.

 Higher Tax Rate on "Specified Income": If the total income of

specific institutions (funds, trusts, universities, educational
institutions, hospitals, or medical institutions covered under
Section 10(23C) or Section 11) includes "specified income,"
that specified income will be taxed at a flat rate of 30%.

 No Deductions Allowed: Crucially, no deductions for

expenditure, allowances, or set-off of losses are permitted
when computing this "specified income." This means the 30%
tax is levied on the gross amount of "specified income."

 Remaining Income Taxed Normally: The rest of the institution's

total income, after reducing the "specified income," will be
taxed according to other applicable provisions of the Income
Tax Act.

 What is "Specified Income"? The section defines "specified

income" to include various scenarios where an institution fails
to comply with the conditions for tax exemption:

o Excess Accumulation: Income accumulated or set aside in

excess of 15% of the total income, if such accumulation is
not otherwise permitted by law.
 o Deemed Income: Certain income that is "deemed" to be
taxable as per specific provisions (like Explanation 4 to
the third proviso of Section 10(23C), or Section 11(1B) or
11(3)). These typically relate to non-application of income
for charitable purposes within prescribed timelines.

o Violation of Exemption Conditions (Section 10(23C)):

Income that loses its exemption under Section 10(23C)
due to violations of specific conditions (e.g., related to
investments, benefit to private individuals, or failure to
apply income).

o Violation of Exemption Conditions (Section 11/13): Income

that is not excluded from total income under Section
11(1)(c) or Section 13(1)(c) and 13(1)(d), which also
relate to misuse of funds, benefits to prohibited persons,
or failure to apply income for charitable or religious
purposes.

In essence, Section 115BBI acts as a penal provision, imposing a

higher tax rate and disallowing deductions on income that does not
adhere to the strict conditions for claiming tax exemptions for
charitable and educational institutions.

Section 115TD : Exit Tax

Section 115TD of the Income Tax Act introduces a "tax on accreted

income" for certain charitable and religious institutions ("specified
persons") when they cease to operate in a manner that qualifies for
tax exemptions. This is essentially an exit tax designed to recover
the tax benefits enjoyed by these entities if they divert their assets
from charitable purposes.

 When the Tax is Triggered: This tax is levied when a specified

person (a trust, institution, university, hospital, etc.,
registered under Section 12AA/12AB or approved under
Section 10(23C)) undergoes any of the following events:

o Conversion: It converts into a form that is no longer

eligible for its tax registration/approval (e.g., its
registration is cancelled, or it changes its objectives to
non-charitable ones without applying for fresh
 registration, or its application for fresh registration is
rejected, or it fails to apply for renewal/re-registration
within prescribed timelines).

o Merger: It merges with an entity that is not another

similarly registered/approved charitable or religious
entity with similar objects.

o Dissolution: Upon dissolution, it fails to transfer all its

assets to another specified person within 12 months.

 What is Taxed: "Accreted Income": The tax is levied on the

"accreted income." This is defined as the fair market value of
the specified person's total assets on the "specified date" (the
date of conversion, merger, or dissolution) exceeding its total
liabilities.

 Exclusions from Accreted Income: Certain assets are excluded

from the calculation of accreted income:

o Assets acquired directly from income that was already

exempt under Section 10(1) (e.g., agricultural income).

o Assets acquired during the period before the institution's

registration/approval became effective, provided no tax
benefits under Sections 11, 12, or 10(23C) were claimed
during that period.

o In case of dissolution, assets and liabilities that have

been transferred to another specified person within the
12-month period.

 Tax Rate: The tax on accreted income is levied at the maximum

marginal rate (currently 30% plus surcharge and cess). This
tax is in addition to any regular income tax.

 Liability to Pay: The specified person itself, along with its

principal officer or trustee, is liable to pay this tax.

 Payment Deadline: The tax must be paid to the Central

Government within 14 days of the occurrence of specific events
(e.g., expiry of appeal period for cancellation/rejection of
registration, end of previous year for certain conversion
scenarios, date of merger, or expiry of the 12-month
dissolution period).
  Finality of Tax: This tax is considered a final payment, and no
further credit or deduction is allowed for this income or the tax
paid on it.

In essence, Section 115TD aims to ensure that assets accumulated

by charitable institutions while enjoying tax benefits are utilized for
charitable purposes or, if not, are subject to a significant exit tax to
recoup the foregone revenue.

Provision of TDS, Restriction on cash expenses and other relevant

matter pertaining to the school.

 TDS is a mechanism for collecting tax at the source of income.

Payments made by the School is income for the recipient of the
payment, thus at the source of payment the person making the
payment is required to deduct Tax also knows as withdrawal tax in
legal language.
 Major sections for deductions of TDS which are generally applicable to
the Schools:

Section – Threshold Threshold Limit Rates Applicable

Nature of Limit till w.e.f 01.04.2025
Payment 31.03.2025
192 - Salary No Change in As per slabs
structure applicable to
individuals (FY
25-26 New
Regime is 4+4);
194-C No Change Single Individual & HUF
Works Contract Transaction – – 1%
(payment for Rs.30,000/- Rest – 2%
carrying out
any work Total Transaction
(including during a FY –
supply of Rs.1 Lakh.
labour) in
pursuance of a
contract)

194-H Rs.15,000/- Rs.20,000/- 2%

Commission
194-I Rent Rs.2,40,000 Rs.50,000 per 2% - Rent on
Includes per annum month or part of plant and
property, month machinery
equipment 10% - Rent on
(smart class land/building/
equipment), furniture/fitting
vehicles,
furniture
194-J Rs.30,000/- Rs.50,000/- Professional
Professional Fees - 10%
Fees (legal,
medical, Technical Fees –
engineering or 2%
architectural
profession or
the profession
of accountancy
or technical
consultancy or
interior
decoration or
advertising or
such other
profession as is
notified by the
CBDT)

Technical
Services
(Explanation
2 to clause (vii)
of sub-section
(1) of section 9
 – managerial,
technical or
consultancy
services

194-IA Rs.50 Lakhs 1%

Payment in
consideration of
transfer of
certain
immovable
property other
than
agricultural
land.
194-Q Payment Rs.50 Lakhs 0.10%
for the
purchase of
goods

Important and noteworthy sections here are:-

 No threshold is applicable for TDS to be deducted for Non-Residents

(Section 195).
 Section 206AA (If the recipient does not provide PAN; TDS
needs to be deducted at the rates specified in the section or at
the rate of 20% whichever is higher.
 Section 206AB (root-cause for most of the TDS demands and litigations
raised during the period 01.07.2021 – 31.03.2025; omitted w.e.f
01.04.2025 required to deduct tax @ 5% or twice the rate mentioned
in any given section, if the recipient’s has not filed his/her income tax
return for the previous year).

Compliances
 NGOs, despite being non-profit, are required to deduct TDS on
specified payments (Section 192, 194-C, 194-I, 194-J).
 TDS to be deposited by the 7th of the next month and in case of
deduction made in the month of March by 30th April.
 TDS Returns to deposited every quarter – Salary and Non
Salary Returns – last date of month following the quarter.
 Q1 - June 30 July 31

Q2 - September 30 October 31

Q3 - December 31 January 31

Q4 - March 31 May 31

Consequences (Few for awareness)

1. Disallowance of 30% of the amount of expenditure – not to
be treated as application of income under section 11(1).
2. 234E - Failure to file TDS/TCS quarterly statements - Fee of
₹200 per day of default, not exceeding the amount of tax
deductible or collectible.
3. 271C - Failure to deduct the whole or any part of tax at
source - Penalty equal to the amount of tax that was failed
to be collected.
4. amount from when TDS was deducted to when it was
actually paid.
5. Prosecution under section 276B - Prosecution punishable with
rigorous imprisonment for a minimum of 3 months to a maximum of 7
years, along with a fine.
6. 271H(1)(a) Failure to submit quarterly return Penalty ranging from
₹10,000 to ₹1,00,000.

Restrictions on Cash Transactions

 Objective: To curb black money, promote digital payments, and

enhance financial transparency.

 Section 269ST: Restrictions on Receiving Cash:

 o General Rule: No person (including an NGO) shall receive an
amount of Rs. 2,00,000 or more:

 In a single transaction.

 From a single person in a single day.

 In respect of a single event or occasion.

o Mode of Receipt: Transactions exceeding Rs. 2,00,000 must be

through account payee cheque, account payee bank draft, or
electronic clearing system through a bank account.

o Penalty: 100% of the amount of the transaction received in cash

in violation of Section 269ST.

 Section 80G and Cash Donations:

o Donations to NGOs claiming tax benefits under Section 80G:

 Cash donations exceeding Rs. 2,000 are NOT eligible

for 80G deduction.

 Encourage donors to use digital payments, cheques, or

demand drafts for donations above Rs. 2,000 to allow them
to claim tax benefits.

 Section 269SS & 269T: Loans/Deposits (Applicable if NGO

engages in such transactions):

o Section 269SS: Prohibits accepting loans or deposits of Rs.

20,000 or more in cash. Must be through account payee
cheque/draft or ECS.

o Section 269T: Restricts repayment of loans or deposits of Rs.

20,000 or more in cash. Must be through account payee
cheque/draft or ECS.

o Penalty: Equal to the amount of the loan/deposit taken/repaid in

cash.

 Section 40A(3): Cash Payments:

Section 11(1)

11. (1) Subject to the provisions of sections 60 to 63, the

following income shall not be included in the total income of
the previous year of the person in receipt of the income—
 (a income derived from property held under trust
) wholly for charitable or religious purposes, to
the extent to which such income is applied to
such purposes in India; and, where any such
income is accumulated or set apart for
application to such purposes in India, to the
extent to which the income so accumulated or
set apart is not in excess of fifteen per cent of
the income from such property;

(b income derived from property held under trust

) in part only for such purposes, the trust having
been created before the commencement of this
Act, to the extent to which such income is
applied to such purposes in India; and, where
any such income is finally set apart for
application to such purposes in India, to the
extent to which the income so set apart is not in
excess of fifteen per cent of the income from
such property;

“Explanation 3.—For the purposes of determining the amount

of application under clause (a) or clause (b), the provisions of
sub-clause (ia) of clause (a) of section 40 and sub-sections (3)
and (3A) of section 40A, shall, mutatis mutandis, apply as they
apply in computing the income chargeable under the head
"Profits and gains of business or profession".

o Disallows business expenses exceeding Rs. 10,000 in cash to a

single person in a day.

o For transport contractors, the limit is Rs. 35,000.

 Cash Withdrawals (Section 194N):

o TDS at 2% on cash withdrawals exceeding Rs. 1 crore in a

financial year from one or more accounts maintained with a
banking company or a co-operative bank or a post office.

o For non-ITR filers, the threshold is reduced to Rs. 20 lakh with a

5% TDS.
 Best Practices for Cash Handling in NGOs:

o Minimize reliance on cash transactions.

o Promote digital payment methods (NEFT, RTGS, UPI, cheques).

o Issue proper receipts for all donations/receipts, especially cash.

o Maintain detailed donor records (PAN for donations above Rs. 2

lakh).

o Regularly reconcile cash balances with receipts.

o Conduct internal cash audits.

o Ensure proper segregation of duties for cash handling.

 Understanding GST provisions relevant for schools

Rate: NIL

Serial No. 66 of Notification No. 12/2017- Central Tax (Rate) dated 28th June,
2017

Services provided –

(a) by an educational institution to its students, faculty and staff;

Chapter/ Section/ Description of Service Rate/Notification

Heading
9992 Services provided by NIL / Serial No. 67 of
the Indian Institutes of Notification No.
Management, as per 12/2017- Central Tax
the guidelines of the (Rate) dated 28th June,
Central Government, to 2017
their students, by way
of the following
educational
programmes, except
Executive Development
Programme: - (a) two
year full time Post
Graduate Programmes
in Management for the
Post Graduate Diploma
in Management, to
which admissions are
made on the basis of
Common Admission
Test (CAT) conducted
by the Indian Institute
of Management; (b)
fellow programme in
Management; (c) five
year integrated
programme in
Management.
 90 or any other Chapter Technical aids for 5%/ Serial No. 257 of
education, Schedule I of the
rehabilitation, Notification No. 1/2017-
vocational training and Central Tax (Rate)
employment of the dated 28th June, 2017
blind such as Braille
typewriters, braille
watches, teaching and
learning aids, games
and other instruments
and vocational aids
specifically adapted for
use of the blind Braille
instruments, paper etc.
9023 Instruments, apparatus 28 %/ Serial No. 191 of
and models, designed Schedule IV of the
for demonstrational Notification No. 1/2017-
purposes (for example, Central Tax (Rate)
in education or dated 28th June, 2017
exhibitions), unsuitable
for other uses
Definition of "Educational Institution" for Exemption: An "Educational
Institution" is defined as an institution providing services by way of:

i. Pre-school education and education up to higher secondary school or

equivalent.

ii. Education as part of a curriculum for obtaining a qualification

recognized by any law in force.

iii. Education as part of an approved vocational education course.

Within the term “educational institution”, sub-clause (ii) covers institutions

providing services by way of education as a part of curriculum for
obtaining a qualification recognised by any law for the time being in
force.

What is the meaning of ‘education as a part of curriculum for obtaining a

qualification recognized by law’?
It means that only such educational services are in the negative list as are
related to delivery of education as ‘a part’ of the curriculum that has been
prescribed for obtaining a qualification prescribed by law.

It is important to understand that to be in the negative list the service should

be delivered as part of curriculum. Conduct of degree courses by colleges,
universities or institutions which lead grant of qualifications recognized by
law would be covered. Training given by private coaching institutes
would not be covered as such training does not lead to grant of a
recognized qualification.

Are services provided by way of education as a part of a prescribed

curriculum for obtaining a qualification recognized by a law of a foreign
country covered in the negative list entry?

No, to be covered in the negative list a course should be recognized by an

Indian law.

Within the term “educational institution”, sub-clause (iii) covers institutions

providing services by way of education as a part of approved vocational
course, and institutions providing the above courses will come within the
ambit of the term educational institution.

Notification No. 12/2017 - Central Tax (Rate) dated 28th June, 2017, defines
approved vocational education course as under:

An “approved vocational education course” means: -

(i) A course run by an industrial training institute or an industrial training

centre affiliated to the National Council for Vocational Training or
State Council for Vocational Training offering courses in designated
trades notified under the Apprentices Act, 1961 (52 of 1961); or

(ii) A Modular Employable Skill Course, approved by the National Council

of Vocational Training, run by a person registered with the Directorate
General of Training, Ministry of Skill Development and
Entrepreneurship.
Thus, educational institutions up to Higher Secondary School level
do not suffer GST on output services and also on most of the
important input services.

Output services of lodging/boarding in hostels provided by such

educational institutions which are providing pre-school education
and education up to higher secondary school or equivalent or
education leading to a qualification recognised by law, are fully
exempt from GST (Tariff lower than 1000 per day per room if
declared separately).

Taxable Services:

The supply of placement services provided to educational institutions for

securing job placements for the students shall be liable to GST. Similarly,
educational institutes such as IITs, IIMs charge a fee from prospective
employers like corporate houses/ MNCs, who come to the institutes for
recruiting candidates through campus interviews in relation to campus
recruitments. Such services shall also be liable to GST.

Similarly; Sale of Uniform, shoes, belts, etc. may be treated as taxable

supplies; not naturally bundled with education can GST registration may be
required for such sale.

Some of the input services like canteen, repairs and maintenance

etc. provided by private players to educational institutions were
subject to service tax in pre-GST era and the same tax treatment
has been continued in GST regime.

Composite and Mixed Supply in so far as Education is concerned

Composite Supply

Boarding schools provide service of education coupled with other services

like providing dwelling units for residence and food. This may be a case of
bundled services if the charges for education and lodging and boarding are
inseparable.

Boarding schools provide service of education coupled with other services

like providing dwelling units for residence and food. In this case since the
predominant nature is determined by the service of education, the other
service of providing residential dwelling will not be considered for the
purpose of determining the tax liability and in this case the entire
consideration for the supply will be exempt.

Incidental auxiliary courses provided by way of hobby classes or extra-

curricular activities in furtherance of overall well-being will be an example of
naturally bundled course, and therefore treated as composite supply.

Mixed Supply

Let’s take another example where a course in a college leads to dual

qualification only one of which is recognized by law. Would service provided
by the college by way of such education be covered by the exemption
notification?

Provision of dual qualifications is in the nature of two separate services as

the curriculum and fees for each of such qualifications are prescribed
separately. Service in respect of each qualification would, therefore, be
assessed separately.

If an artificial bundle of service is created by clubbing two courses together,

only one of which leads to a qualification recognized by law, then by
application of the rule of determination of taxability of a supply which is not
bundled in the ordinary course of business, it shall be treated as a mixed
supply as per provisions contained in section 2(74) read with section 8 of the
CGST Act, 2017. The taxability will be determined by the supply which
attracts highest rate of GST.

Sum-up

Composite and Mixed Supply in Education:

  Boarding Schools: Services like education, dwelling units, and food
provided by boarding schools are considered "naturally bundled" if
charges are inseparable. Since education is the predominant element,
the entire consideration is exempt.
 Dual Qualifications: If a college course leads to two qualifications,
only one of which is recognized by law, and the curriculum and fees for
each are separate, the services for each qualification are assessed
separately.
 Artificial Bundling (Mixed Supply): If an artificial bundle of services
is created by clubbing two courses, only one of which leads to a
recognized qualification, it's treated as a mixed supply. The taxability is
determined by the supply that attracts the highest GST rate.
 Incidental Auxiliary Courses (Composite Supply): Hobby classes
or extra-curricular activities offered for overall well-being are naturally
bundled and treated as a composite supply. However, if significant
extra billing occurs for the unrecognized component, it might be
considered artificial bundling and treated as a mixed supply, attracting
the higher tax rate for the entire consideration.
 Placement Services: Placement services provided to educational
institutions for securing job placements for students, or fees charged
by institutes (like IITs, IIMs) from prospective employers for campus
recruitments, are liable to service tax (and by extension, GST).

Particulars Composite Supply Mixed supply

Main item Principal item Item with highest tax rate

Tax rate Tax rate of principal Highest tax rate of all the
applicable item items

Service Received by an Educational Institution:

Serial No. 66 of Notification No. 12/2017- Central Tax (Rate) dated 28th June,
2017

Services provided –

(b) to an educational institution, by way of, -

(i) transportation of students, faculty and staff;

(ii) catering, including any mid-day meals scheme sponsored by the

Central Government, State Government or Union territory;

(iii) security or cleaning or housekeeping services performed in such

educational institution;

(iv) A services relating to admission to, or conduct of examination by,

such institution; up to higher secondary:

Provided that nothing contained in entry (b) shall apply to an

educational institution other than an institution providing services by
way of pre-school education and education up to higher secondary
school or equivalent

(v) supply of online educational journals or periodicals

Provided further that nothing contained in sub-item (v) of item (b) shall
apply to an institution providing services by way of, - (i) pre-school
education and education up to higher secondary school or equivalent;
or (ii) education as a part of an approved vocational education
course.*

Services by way of giving on hire – (a) to a state transport

undertaking, a motor vehicle meant to carry more than twelve
passengers; or (b) to a goods transport agency, a means of
transportation of goods. [(c) motor vehicle for transport of students,
faculty and staff, to a person providing services of transportation of
students, faculty and staff to an educational institution providing
services by way of pre-school education and education upto higher
secondary school or equivalent.

Other Points:
 GST
Scenario Applicable Basis
?

Property rented to a
✅ Taxable Landlord will collect GST from the school
school for classes

Renting for commercial use; School shall

obtain registration and pay GST;
Property rented by a
✅ Taxable alternatively; Bank will pay GST on reverse
school to a bank
charge and School need not obtain
registration

Property rented to
Not covered under definition of
coaching centre ✅ Taxable
“educational institution”
(non-recognized)

Hostel facility
Treated as part of education services (per
provided by ❌ Exempt
CBIC FAQ)
school/college

Educational Institution run by charitable organizations.

Apart from the general exemption available to all educational institutions,

charitable activities of entities registered under Section 12AA of the Income
Tax Act is also exempt.

The term charitable activities are also defined in the notification. Thus, if
trusts are running schools, colleges or any other educational institutions or
performing activities related to advancement of educational programmes
specifically for abandoned, orphans, homeless children, physically or
mentally abused persons, prisoners or persons over age of 65 years residing
in a rural area, activities will be considered as charitable and income from
such services will be wholly exempt from GST in terms of Notification No.
12/2017 - Central Tax (Rate) dated 28th June, 2017.

RCM:

If already registered under GST; Applicability of Reverse charge on

  Arbitration Services
 Goods Transport Agency (if not opting for forward charge) (Applicable
on Societies irrespective of registration in GST)
 Advocate & Counsellor Services
 Renting of Immovable Property

Conclusion:

 GST law aims to ensure that core educational services up to higher

secondary school or equivalent are fully exempt.
 Auxiliary services received by such institutions for education up to the
higher secondary level are also exempt.
 Other education-related services not covered by the exemption are
taxed at 18%, with full ITC admissibility for such taxable services where
the output service is not exempt.
 ICAI’s guidelines on accounting and auditing of the schools and
latest guidelines with respect to presentation of accounts.

Guidance Note on accounting by school [GN(A) 21] formulated in 2005

1. Basis of Accounting

 Schools should use the accrual system (record income/expenses

when they are earned or incurred, not just when cash is received or
paid).

 Avoid cash basis, as it does not give a full picture of the school’s
finances.

2. Income Recognition (How to record income)

 Fees (tuition, activity fees): Record over the academic year (even if
paid upfront).

 One-time fees (like admission): Record when received.

 Caution money: Not income—it's a liability (must be returned unless

forfeited).

 Canteen/bookstore/transport: Record income as per services

provided.

 Grants and donations: Record when there's a certainty of receiving

and using them as per terms.

3. Expense Recognition (How to record expenses)

 Salaries and benefits: Recognize when the employee works, not just
when paid.

 Depreciation: Spread the cost of assets (e.g., furniture, computers)

over their useful life.

 Utilities and supplies: Recognize in the period they are used.

4. Assets and Liabilities

 Record assets (like buildings or equipment) when owned and usable.

  Record liabilities (like unpaid bills or received fees in advance) when
they become due.

5. Books of Account to Maintain

 Record all income and expenses, assets, and liabilities.

 Keep books on an accrual and double-entry basis.

6. Financial Statements Format

 Prepare:

o Income & Expenditure Account (like a profit/loss account)

o Balance Sheet (shows assets, liabilities, and funds)

 Use fund-based accounting:

o General Fund: For day-to-day expenses.

o Designated Funds: Set aside by the school (e.g., Library Fund).

o Restricted Funds: Money with specific use conditions from

donors or government.

Why This is Important

 Helps schools comply with laws and build trust with stakeholders.

 Brings uniformity in school accounting across India.

 Encourages schools to move towards professional financial

reporting.

In August 2023 (Replacing the earlier guidance note of 2022), the Accounting
Standards Board (ASB) of ICAI released a Guidance note suggesting standard
formats for the financial statements of non-corporate entities. This was done
to bring uniformity in how such financial information is presented. The guide
also included sample formats to help users.

To improve the quality and clarity of financial statements and to provide clear
guidance to ICAI members on applying Accounting Standards, the ASB has
now upgraded this Technical Guide into a Guidance Note.
Who Should Follow It?

 All non-corporate entities, except:

o Where laws or regulators already prescribe a specific format

(like Trusts under Maharashtra law).

o LLPs (Limited Liability Partnerships), which are corporate

entities.

When is this Effective?

 Applicable for financial statements from April 1, 2024, onwards.

 It replaces the earlier Technical Guide issued in June 2022.

Key Components of Financial Statements

1. Balance Sheet – Shows what the entity owns and owes at a point in
time.

2. Statement of Profit and Loss – Shows income and expenses over a

period.

3. Cash Flow Statement – Optional for small entities; shows actual cash
movement.

4. Notes to Accounts – Explains details behind numbers (like methods

used, breakup of items, etc.)

Formats Prescribed

The guidance note gives clear, standard formats for:

 Balance Sheet with sections like Owner's Capital, Reserves, Assets,

Liabilities.

 Profit & Loss with standard heads: Revenue, Expenses, Profit before
Tax, etc.

 Clear disclosure requirements in Notes to Accounts for transparency.

Classification of Non-Corporate Entities (For AS Applicability)

Entities are divided into 4 levels to decide the level of accounting standard
compliance:

Level Criteria (turnover, borrowing, etc.) Requirements

Level Large entities (Turnover > ₹250 cr or Must comply fully with
I Borrowings > ₹50 cr) all AS

Level
Turnover ₹50–250 cr, Borrowings ₹10–50 cr Partial relaxation
II

Level
Turnover ₹10–50 cr, Borrowings ₹2–10 cr More relaxation
III

Level
Smallest (below Level III) Maximum relaxation
IV

Relaxations for Smaller Entities (MSMEs)

 Level II–IV entities get exemptions from certain detailed disclosures

and complex calculations (like actuarial valuation of employee
benefits).

 Encourages compliance while recognizing smaller entities’

limitations.

Key Terms Simplified

 Owners’ Funds = Capital + Reserves (what the owner has put in and
retained).

 Assets = What the entity owns (cash, equipment, receivables).

 Liabilities = What the entity owes (loans, payables).

 Income = Earnings from main business and other sources.

 Expenses = Salaries, rent, utilities, depreciation, etc.

Important Notes

 The format allows customization based on the nature of business.

 Disclosures must still follow Accounting Standards (AS).

 All figures must show comparison with the previous year.

 Entities must use accrual basis (not cash basis) for accounting.

Summary

This Guidance Note helps bring uniformity, transparency, and better

comparability in how non-corporate entities present their financial
statements. It ensures that even smaller entities report their financials in a
professional and reliable way.

Definition (Simplified):

All business or professional entities that are not companies under the
Companies Act and not LLPs under the LLP Act are considered non-
corporate entities.

Examples of Non-Corporate Entities (as listed in the Guidance Note):

1. Sole proprietorships

2. Hindu Undivided Families (HUFs)

3. Partnership firms (registered or unregistered)

4. Associations of Persons (AOPs) and Bodies of Individuals (BOIs)

5. Resident Welfare Associations

6. Societies (registered under any law)

7. Trusts (registered or unregistered)

8. Statutory corporations, autonomous bodies, and authorities

 9. Any organization engaged in business or professional activities
not registered as a company or LLP

Is rounding off mandatory in the Guidance Note on Financial

Statements of Non-Corporate Entities?

No, rounding off is not mandatory — it is optional, based on the total

income of the entity.

However, if an entity chooses to round off, it must do so consistently

throughout the financial statements.

Guideline for Rounding Off (as per the Guidance Note):

Total Income Rounding Allowed To

Less than ₹100 Hundreds, Thousands, Lakhs, or Millions (or decimals

crore thereof)

₹100 crore or
Lakhs, Millions, or Crores (or decimals thereof)
more

Once you choose a unit (e.g., lakhs or crores), you must use it uniformly
across the entire set of financial statements.

Practical Tip:

Rounding off makes financials easier to read, but:

 Ensure accuracy in disclosures.

 Mention the unit used (₹ in lakhs, crores, etc.) at the top of the
statement.

Who is Exempt from Actuarial Valuation?

Level II and III non-corporate entities:

  If they employ fewer than 50 people on average during the
year, they are exempt from doing actuarial valuation.

 They may use any rational method (like assuming all benefits are
payable at year-end).

Level IV non-corporate entities (Micro entities):

 Exempt by default, regardless of the number of employees.

Who must do actuarial valuation?

 Level I entities, and

 Level II & III entities with 50 or more employees on average

during the year:

o Must use actuarial valuation (Projected Unit Credit Method) for

defined benefit plans and long-term employee benefits.

Link for financial reporting format:

[Link]
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