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This article has been written by Pratyusha Ganesh, from Symbiosis Law School, Hyderabad.

Introduction

A well-structured tax system is set-up by India for its people. This is because taxes are the largest and the most important income for the government to develop the country.

Taxes have to be passed as a law for the government to implement them. The Central and the state government, along with municipal corporations are behind this planning.

Not only god but the income tax department admits the fact that charity is an excellent task.

Section 80G of the Income Tax Act (hereafter referred to as the I-T Act) 1961, allows donations made to specified relief funds and charitable institutions as a reduction from the gross total income of an individual before arriving at the taxable income.

The research will focus on the meaning, mode and eligibility of charitable donations and the tax benefit received thereof. 

Charitable donations meaning

“Contributions made to certain relief funds and charitable institutions can be claimed as a deduction under Section 80G of the Income Tax Act. All donations, however, are not eligible for deductions under section 80G. Only donations made to prescribed funds qualify as a deduction.”

Any taxpayer, i.e., individuals, company, firm or any other person can claim these deductions. These deductions and other similar reliefs, allow donors in the reduction of their taxable income as they are contributing a part of their assets. These schemes also increase the incentive for giving of the taxpayers.

In the case of CIT v Ahmadabad Rana Caste Association, it was held that the purpose for which a donation is made has to be charitable and for the benefit of the society at large and not for a personal benefit. Only if this measure is fulfilled, the amount of donation will be exempted from tax. 

Mode of payment/donation eligible for deduction under Section 80G 

The deduction of tax benefits in charitable donations can only be claimed when the contribution is made in the form of cash or cheque. However, the donations made in cash exceeding Rs. 10,000 do not qualify for deduction.  Donations made in-kind such as food, material, clothes, medicines etc. do not qualify for any tax deduction under section 80G.

Starting from Financial Year 2017-18 onwards, any donations made in cash exceeding Rs 2,000 will not qualify as a deduction. The donations above Rs 2,000 should be made in any mode other than cash to be a valid deduction under section 80G.

Amount of Donation: The various donations specified in section 80G are eligible for a deduction of up to either 100% or 50% with or without restriction, as provided in section 80G. 

Claiming tax deduction

Your Income Tax Return should contain the following details for you to be able to claim tax deductions: 

  • Name, PAN number and the address of the Donee;
  • Amount of Contribution.

Apart from the above, there are 2 important requirements for claiming a tax deduction in India

  • A stamped receipt; 
  • Donations in the form of cash/ cheque.

The following are the various institutions to whom donations can be made

  • Donation to political parties or electoral trust;
  • Donation to place of historic importance and public place of religious worship and charitable institutions;
  • Donation for research and development.

Each one is then descriptively discussed in the further chapters.

With respect to the Taxation of the Non-profit organizations in India, the returns are filed for every financial year at the state level with the Commissioner of Charity or with the Registrar of Societies respectively. At the national level, the returns are filed with the Income Tax dept. along with the Home Ministry (in certain cases). 

As Charity is subject to the society, the state governments of different states have different legislations for the same. A few examples of the above -mentioned legislations are: The Bombay Public Trusts Act 1950, Rajasthan trusts Act of 1959, and the Madhya Pradesh Trust Act of 1951.

Eligibility and deduction limits of the taxpayers

Eligibility of the taxpayer

Section 80-G of the Income Tax Act provides that only the income that has been donated qualify for tax deductions and can be claimed by filing the ITR (Income Tax Return). This deduction can be claimed by a taxpayer regardless of their source of income and can be applied to all assesses i.e., a resident Indian, a HUF, a company, an NRI, and others. 

They just have to make the appropriate contribution. There are variations as to the kind of donations that qualify for a 100% tax deduction. There are other restrictions and limitations such as 50% and 10% of the sum contributed from the gross total income of a taxpayer. 

Tax Deduction Limits and percentage

Section 80-G of the IT Act prescribes the tax deduction limits of 50% and 100%, according to the type and entity to which the donation is made. This limit can be subject to ‘With’ or ‘Without’ the upper limit.

Donations “without upper limit”: Under the “without upper limit” clause, a claim of either 50% or 100% on the donation amount, can be made by the donor and is not subject to any limitation.  

For example: The “Prime Minister’s National Relief Fund” and the “National Defense Fund” are set up by the central government and are subject to ‘without upper limit’ clause and 100% deduction on tax. Whereas, the “Jawahar Lal Nehru Memorial Fund and Prime Minister’s Drought Fund” are trusts that permit only 50% tax deduction on the amount donated by the donor.

Donations “With upper limit”: Under the “With upper limit” clause, a deduction of either 100% or 50% (as allowed by that particular entity) of 10% of the gross adjusted income of the individual can be claimed.

The charitable institutions under which deductions can be claimed:

The usual institutions set up for claiming tax rebates are 

Trusts and funds set up by the Govt. 

Under this head, 100% of the amount donated can be deducted. Some important funds/institutions under this category are:

  • The National Defense Fund
  • The Prime Minister’s National Relief Fund/ Chief Minister’s Relief Fund
  • Earthquake/ Flood Relief Fund

The funds eligible for 100% rebate on tax are only set up by the Govt. and not the Private Trusts. Therefore, the donations under this head, do not adhere to the ceiling limit of 10% of the Gross Total Income that is cited under Chapter VI-A of the Income Tax Act. 

Electoral Trusts

The idea of Electoral Trusts was presented in the year 2017 to encourage transparency in the political funding system. Citizens can also derive a benefit out of the same alongside ensuring transparency. The State Bank of India and its branches sell these Electoral bonds. By donating to political parties, 100% deduction in the amount can be received under sections 80 GGC and 80 GGD of the Income Tax Act.

Donations to Religious and charitable institutions are granted tax benefits under Section 80G of the Income Tax Act.

The taxpayer has to be cautious if the entity/ institution is approved by the commissioner of income tax.

Under Section 80G, only a few entities are allowed a deduction rate of 100% whereas the other have a rate of 50%. 

A sum of payment is eligible for deduction under section 80G, only if it is made through cash, cheque or any form of digital payment.

Cash donations are restricted to ₹2,000 and anything above that is not eligible for deduction but there are no such specifications with respect to payment by cheques. Contributions in the form of ration, clothes, and the like do not form a part of this section.

Some of the approved entities include India Wildlife Conservation Trust, Bengaluru, Model Education and Welfare Society, Aurangabad, National Defense Fund and Indira Gandhi Memorial Trust. This section gives you the liberty of donating without an upper limit.

Donation for research and development

Section 80 GGA provides tax benefits on contribution to the development of science in the society. The citizens must be cautious if their money is being used for “scientific research or for social science or statistical research”. 

Therefore, donations have to be made to the institutions that are approved by the income tax department for section 80 GGA

A 100% tax deduction is received on such donations under Section 35 AC and 34 CCA. The maximum limit for such donations (i.e., eligible for 100% tax rebate) is Rs. 10,000. 

In contrast to the certificate granted u/s 80G, the certificate u/s 35 AC is only granted to an eligible project that is approved by the govt. organization and not to any organization as a whole.

Some examples of such institutions are: All India Institute of Medical Sciences (AIIMS), Pollution Control projects, projects for the construction of wells and providing of drinking water in rural areas, Rajiv Gandhi Foundation and Indian Institutes of Technology (IIT) and others. 

Tax-filing process

The following are the steps that have to be followed while filing an Income tax Return:

  • Documents such as TDS certificates, capital gains statement, salary slips, interest certificates and the like have to be collected as they will aid in the computation of the gross taxable income. This will in turn provide details about the TDS i.e., the Tax deducted at source from the income of that particular Financial year. After the TDS, the bank issues Form 16 A for the TDS deducted on the interest payment of a person on his sum of Fixed Deposit. All the TDS certificates have to be in the TRACES format.

All the certificates have to be digitally signed. A checkmark indicates the verification of the signature whereas, the non-verified ones will bear a question mark. 

The following documents are needed to file an ITR:

  • Name of the donee (the institution receiving the donation)
  • PAN of the donee
  • Address of donee
  • Amount of contribution
  • Adhaar
  • Bank account details
  • Form 16
  • Investments details
  • The next step is to download and verify Form 26 AS. This form comprises of the specifics of the tax deducted from the income during the Financial Year and deposited against the person’s PAN. Any errors in this step must be immediately rectified by taking the matter to the deductor i.e., a bank/ employer/ other. 
  • The total income chargeable to tax has to be calculated. This is done by adding the incomes from different heads and removing the deductions. 
  • The next step is to calculate the tax liability of an individual by applying the tax rate in force for that particular Fiscal year as per the income of that individual. 
  • After the computation of the tax charge, deductions such as the TDS, TCS and Advance Tax have to be made as they are usually prepaid for a Financial year. Interests (if any) have to be added under S 234 A, 234 B, 234 C to the deduced amount.
  • After the payment of the above tax, benefits and refunds, (in this case, for the charitable sector) can be claimed by filing a return statement. The form for the same s notified by the IT department and varies for every assessment year. This form can be downloaded and filled in software’s like, Microsoft Excel.
  • The final step in the process of filing is verification and must be done within 120 days within the date of filing and an acknowledgement for the same has to be received. The Income Tax department processes the return after such verification.

Documents required for claiming tax deduction

The most important factor in gaining a tax advantage under the head of the Charitable Sector is the collection and computation of proper documents. 

Along with the previously mentioned documents in step 1 of the tax filing process, the following documents are mandatory:

  • A Stamped Receipt containing the name, address and PAN of the trust, the name of the donor and the sum donated are compulsory to claim the rebate. In cases where the amount is eligible for a 100% deduction, attachment of Form-58 is mandatory. In the absence of Form-58, the 100% deduction claim can be rejected. 
  • A valid Registration number of the Trust (U/S 80-G), which is issued by the Income Tax department has to be mentioned on the receipt. This registration number is valid for a limited time period (usually 2 years) and is renewable. The period of validity of the registration number has to be specifically mentioned in the receipt.
  • A Photocopy of the 80-G certificate must also be added to the receipt. 
  • The donor has to make sure that registration is valid on the date on which it i0s made and is renewed within the specified time period to gain the tax benefits. 

Conclusion

It is the 21st century but people are still unaware of the tax benefits received by way of donations. There is a lack of knowledge and awareness with respect to claiming the benefits. A significant cause for the same is that, most salaried individuals receive Form-16 and it does not mention any deduction/rebate on the donations made u/s 80G. 

This means the salaried are denied the tax benefits at the TDS (tax deducted at source) stage. In such a case, they have to provide the details of the donations made by them while filing the tax return and claim a refund.

This policy of exempting the taxation of the income from charitable institutions might be causing an economic stunt. It is possible that it can cause a financial deficit in the long run and can prove to be harmful for revenue mobilization.

However, it is proving to be beneficial for a salaried individual, making the donations as he is being exempted from paying the tax according to the prevailing slab rate. It is also important to note that many Non-govt. organizations (which are not funded by the Govt.) and are working towards the betterment of society and towards eliminating poverty, do not avail ANY tax concessions. This slows down the rate of social welfare and there is no incentive or motivation for them to work towards charitable projects.

There is quite an abuse of the existing tax regime and the data for the same is unavailable. Funds are being misplaced and misused and the most problematic aspect of a charitable donation is that it favours the rich and makes it “cheaper” for them as they have more money to spare. There is also an ongoing debate about the role of Govt. and the idea of philanthropy and what is better for the country at the moment.

Recommendations

  • More education and awareness are required among the salaried individuals with respect to the taxes paid by them and on the maximization of their wealth.
  • The Indian education system must cover the aspects of our taxation system and educate young adults about the same.  
  • Every state must have its own charity commission and the center must ensure transparency in its working. The funds collected must be utilized for the well-being of the nation. Fraudulent activities must be avoided and must be punished with severe sentence.
  • The center i.e. the Income Tax department must have adequate data and feedback about the working of the state commissions.
  • Such a feedback and reporting must be detailed, comprehensive and valuable. Constant efforts are required for the effective functioning of the system.  
  • Provisions for Anti-Money Laundering and other such crimes must be formulated and included in the existing Acts. 
  • A Risk-Based Approach has to be adopted as this will make sure that the trustees discharge their duties and legal obligations.

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