Direct Tax Laws & International Taxation · Assessment of Trusts and Institutions, Political Parties and Other Special Entities

Other Institutions: Universities, Hospitals and Funds (CA Final Direct Tax)

Updated 5 October 2026 · Fact-checked

Under the Income-tax Act, 2025, a university or educational institution existing solely for education, a hospital or medical institution existing solely for philanthropy, and certain notified funds can claim exemption on their income. You solve a question by checking the object, no profit motive, approval or notification, the conditions on application and accumulation, and any breach that withdraws the exemption.

Understand Other Institutions: Universities, Hospitals and Funds

Charitable trusts are one route to tax exemption. The Act also gives separate exemption to specific kinds of institutions: universities and other educational institutions, hospitals and other medical institutions, and certain funds or institutions that the Government notifies. The idea is simple. If the body exists for education, medical relief or a public-welfare cause, and not to make profit, its income should not be taxed.

The word solely is the heart of this topic. An educational institution must exist solely for education and not for profit. A hospital must exist solely for philanthropic purposes. Education does not mean only classroom teaching in a loose sense. The test is whether the dominant and real object is education. Surplus from running the school is fine. Profit-making as a purpose is not.

Most of these bodies need an approval or notification before they claim exemption. Some are covered because they are wholly or substantially financed by the Government. Smaller bodies whose annual receipts stay within a prescribed limit may be treated differently from larger ones. Check the limit and the prescribed authority in your ICAI material and the Income-tax Rules, 2026. Do not rely on memory of the old Act.

Approval is not enough. Each of these exemptions comes with conditions: proper books, audit where required, application of income for the objects, limits and conditions on accumulation, investment only in permitted modes, and no undue benefit to specified persons such as founders, trustees and their relatives. For these institutions, such conditions apply through the conditions attached to their own provisions. Do not present the 85% application rule as a universal test for all of them. Check the exact provision in the Income-tax Act, 2025 and the conditions it carries before you apply the 85% and accumulation rules. If the conditions are broken, the approval can be withdrawn and the income becomes taxable.

A charitable trust under the general charity provisions is different from an institution in this topic. A trust is judged by its charitable purposes and registration. An institution here is judged by its specific nature (education or medical relief) and its own approval or notification. A body may fit both. Read the facts and choose the route the question points to.

Key rules to remember

Core test for educational institutions: Exempt if: existing solely for education + not for profit + approved/notified or otherwise covered + conditions met; All limbs must be met together. A profit motive defeats the claim even if education is also carried on.
Core test for hospitals and medical institutions: Exempt if: existing solely for philanthropic purposes + approved/notified or otherwise covered + conditions met; Philanthropy means relief without a profit objective. Charging fees does not by itself disqualify, but profit as the aim does.
Application of income (where the trust-type rule applies): Up to 15% of income may be left unapplied without conditions (in permitted investment modes). Excess over 15% unapplied → taxable unless accumulated under the prescribed conditions; Application is tested on the income of the tax year as defined in the Act, not on a loose gross figure. Application on capital assets and corpus donations are treated separately. Accumulation beyond 15% needs conditions such as a specified purpose, prescribed notice, permitted investment and a time limit. Confirm in the Act, 2025 that this rule applies to the institution in the question.
Government-financed bodies: Wholly or substantially financed by Government → can fall within the exemption; Substantial financing is judged on facts. Do not assume a fixed percentage unless the text gives one.
Consequence of breach: Violation of conditions → approval withdrawn → income taxed; Typical breaches are undue benefit to specified persons, wrong investments and unapproved diversion of funds.

How to solve Other Institutions: Universities, Hospitals and Funds questions

Use the same order for any question on exemption of universities, hospitals and funds. It keeps your answer in provision-facts-conclusion form.

1Identify the entity: university, other educational institution, hospital, medical institution, fund, or other notified body.
2State the object test: solely for education, or solely for philanthropic purposes, and not for profit. Compare it with the facts.
3Check the route: approved by the prescribed authority, notified by the Government, wholly or substantially Government-financed, or within the small-receipts limit.
4Check compliance: books, audit, registration, and investment in permitted modes.
5Test application of income under the conditions of the relevant provision: compute the income, the amount applied, and the amount left unapplied. The 15% that may stay unapplied needs no conditions but must be held in permitted modes. Test the excess against the accumulation conditions.
6Look for undue benefit to specified persons such as trustees, founders, relatives or their concerns.
7Check for any breach that may lead to withdrawal of approval or taxation.
8Conclude clearly: fully exempt, partly taxable (state the amount), or not exempt, with the reason.

Quickest way: Four-gate check

When to use it: Use it for case-scenario MCQs and short written answers when you have only a few minutes.

Gate 1, Object: Is it solely education or solely philanthropic, and not for profit? If no, stop. It is not exempt.
Gate 2, Status: Is there approval, notification or Government financing? If none and the receipts are not within the limit, stop.
Gate 3, Application: Where the application rule applies, has the institution applied its income for the objects, leaving no more than 15% unapplied? Any excess over 15% is taxable unless accumulated under the prescribed conditions. Treat capital-asset application and corpus donations separately.
Gate 4, Benefit: Is any undue benefit going to specified persons? If yes, expect withdrawal and tax.

Common mistakes in Other Institutions: Universities, Hospitals and Funds

Treating any surplus as proof of profit motive.
Students read 'not for profit' as 'must not earn surplus'.
Fix: The test is the purpose of the institution. A surplus applied to its own objects is consistent with exemption. Profit as the aim is not.
Assuming exemption is automatic because the body is a school or hospital.
The nature of the activity feels sufficient.
Fix: Check whether approval, notification or Government financing exists. Without a valid route, the exemption fails.
Confusing a charitable trust with an educational institution.
Both deal with education and charity and use similar vocabulary.
Fix: Decide which regime the facts invoke. A trust is tested on charitable purpose and registration. A named institution is tested on its own object and approval.
Ignoring the 'solely' condition when education is a side activity.
Students see some educational activity and conclude it qualifies.
Fix: If the main object is commercial, such as a coaching business for profit, the body does not exist solely for education.
Missing undue benefit to specified persons.
The facts hide it inside a rent, salary or loan to a related concern.
Fix: List every transaction with founders, trustees, relatives and their concerns. Test whether it is at a fair price.
Stating a limit, rate or section number from the old law.
Notes and coaching memory come from the 1961 Act.
Fix: Use the Income-tax Act, 2025 and the 2026 Rules. If you are unsure of a number, state the rule in words.
Applying the 85% rule to every institution as a universal test.
Students carry the trust rule over to universities and hospitals without checking their provisions.
Fix: Check the conditions attached to the specific provision in the Act, 2025. Apply the 85% and accumulation rules only as that provision requires, and use the question's facts to decide.

Worked examples

Example 1

Sunrise Education Society runs a school and a junior college. It is approved by the prescribed authority and is not Government-financed. Assume the application rule with a 15% allowance applies to it. Its income for the tax year is ₹60,00,000 before any application. It spends ₹48,00,000 on its educational objects and keeps ₹12,00,000 in a bank deposit (a permitted mode) with no specific purpose and no accumulation notice. All books are audited and there are no related-party dealings. How much, if any, is taxable?

Show the solution

Object: the society exists solely for education and runs on a not-for-profit basis. The object test is met.
Status: approval by the prescribed authority is present. The status test is met.
Amount that may stay unapplied without conditions: 15% × ₹60,00,000 = ₹9,00,000. It must be held in permitted modes, and the bank deposit is one.
Actual application: ₹48,00,000. Actual unapplied: ₹60,00,000 − ₹48,00,000 = ₹12,00,000.
Excess over the permitted 15%: ₹12,00,000 − ₹9,00,000 = ₹3,00,000.
This ₹3,00,000 is taxable unless it is accumulated under the prescribed conditions: a specified purpose, the prescribed notice, permitted investment and the time limit. Here there is no specified purpose and no notice, so the conditions are not met.
No undue benefit and books are in order, so approval is not at risk.

Answer: ₹3,00,000 is taxable, being the unapplied income above the permitted 15% (₹9,00,000) that is not accumulated under the prescribed conditions. The ₹9,00,000 within 15% is not taxed, as it is held in a permitted mode. The remaining ₹57,00,000 stays exempt.

Example 2

City Care Hospital Trust runs a 200-bed hospital. It was notified as a philanthropic medical institution. During the year, it rented a building from the managing trustee's company at three times the market rent, and it advanced a large unsecured loan to the trustee's brother at no interest. Advise on the exemption.

Show the solution

Object: running a hospital qualifies as a medical institution, and notification is present. The initial tests are met.
Facts to test: the trustee's company is a related concern. Paying three times the market rent gives that person an undue benefit.
The interest-free unsecured loan to a trustee's relative is also a benefit to a specified person. It is not an investment in the permitted modes.
These are breaches of the conditions for exemption.
Consequence: the approval or notification may be withdrawn, and the income may become taxable after the authority follows the prescribed procedure.

Answer: The hospital is at risk of losing its exemption. Excess rent and the interest-free loan to a trustee's relative are undue benefits to specified persons and a misuse of funds. The income can be taxed once the approval or notification is withdrawn.

Exam tips

Write the object test first, using the word 'solely', then link each fact to it. Examiners award marks for this link.
In MCQs, look for one hidden breach: a related-party rent, a loan, or an investment outside the permitted modes.
When the application rule applies, show the working as a short list: income, amount applied, amount unapplied, permitted 15%, excess.
Use only Income-tax Act, 2025 language such as 'tax year'. Do not quote old section numbers.
When a question compares a trust and an institution, give two or three clear points: governing test, approval route and typical conditions.

Practice questions from Assessment of Trusts and Institutions, Political Parties and Other Special Entities

Other Institutions: Universities, Hospitals and Funds: frequently asked questions

Does a university have to be non-profit to claim exemption?

Yes. It must exist solely for education and not for the purpose of profit. Surplus applied to its own educational objects does not defeat the exemption.

What is the difference between a charitable trust and an educational institution for exemption?

A charitable trust is tested on its charitable purposes and registration. An educational institution or hospital is tested on its own object, being solely education or solely philanthropy, and on its approval or notification. Conditions on application, accumulation, investment and benefit to related persons apply to institutions through their own provisions, so check the exact provision in the Act, 2025.

Can a hospital charge fees and still be exempt?

Yes, charging fees is not by itself fatal. The hospital must still exist solely for philanthropic purposes and not for profit. If fees are the way it makes profit for the owners, the exemption is at risk.

What happens if an exempt institution breaks the conditions?

The approval or notification can be withdrawn after the prescribed procedure. After that, its income can be taxed. Undue benefit to specified persons is the most common ground.