Save tax while you practise the art of giving

‘Ask and ye shall receive', is a biblical quotation. But when it comes to charity, this can easily be modified to ‘Give and ye shall receive'. Indian tax laws encourage you to spend on your children's education, retirement and buy your own home.

They also encourage you to give away to the needy. Section 80G, the section of Income Tax law that allows you to claim a deduction on certain donations, is almost as old as the law itself. Here's how you can benefit from giving.

Eligibility

The law allows you (individual, company or non-resident Indian) to make a claim under this provision.

But you can't just donate to anyone or any organisation and claim a tax benefit; only certain funds and institutions qualify.

You can view the entire list of eligible organisations at  http://law.incometaxindia.gov.in/DIT/Income-tax-acts.aspx . Broadly, donations are classified as those you give to private trusts and those to trusts and funds set up by the Government of India.

The former include orphanages, old-age homes, and shelters for the destitute or charity hospitals.

The government-mooted funds, on the other hand, typically raise money during calamities or for various welfare measures. Donating to government institutions requires little verification, but exercise discretion when it comes to privately run trusts.

Legitimate trusts, verified by authorities, are registered with the Income Tax department and get an 80G certificate. The government releases a list of such institutions, but you can always ask for a copy of the registration before you donate.

When donating, you should keep a few things in mind. You cannot claim benefits for donations made to a foreign trust. You can make a tax claim for donation to political parties under a different provision called Section 80GGC.

Your donation must be either in cash or by cheque. Giving clothes or food during natural disasters, even to a qualified trust, doesn't count towards tax exemption.

Deduction allowed

The entire sum that you donate will not qualify for deduction.

Don't think that you can give Rs 1 lakh to some organisation and write it off in taxes. Not so easy! There are two stages to this. The first involves knowing the total amount that will qualify for deduction. The second involves calculating the actual deduction.

Let's take an example. You donate, say, Rs 1 lakh to a registered private trust.

The amount that qualifies for deduction – stage one – will be restricted to 10 per cent of your total income after all your investment-related deductions (called the 80C deductions), in certain cases.

In the above example, if your income is, say, Rs 6 lakh after deductions such as provident fund or insurance premium, only 10 per cent of this Rs 60,000 qualifies as a donation. This does not end here.

The tax authorities classify donations in two: those that qualify for full tax deduction and those where only half the amount is eligible for the benefit.

However, government relief funds or welfare funds usually will not have this restriction. If you donate to government funds, such as the Prime Minister's National Relief Fund or the National Children's Fund, you can deduct the entire amount. On the other hand, if you handed over your money to a private trust, only 50 per cent of the contribution will receive tax relief. The Web site link given above will provide more details on what is eligible for full deduction. To extend the above example, only Rs 30,000, which is half of the qualifying amount of Rs 60,000, can be deducted.

In all, Rs 1 lakh fetched you Rs 30,000 in tax break. But if you instead donate this to, say, the National Children's Fund or National Sports Fund, neither the 10 per cent restriction nor the 50 per cent deduction will apply. You will get the entire Rs 1 lakh as tax break from your Rs 6 lakh income.

Claiming the benefit

To avail tax benefits on your donations, you need to show proof, usually a stamped receipt that shows your name, the name and address of the trust and the amount donated.

But watch out for the more important component of the receipt- the registration number that the Tax department issued to the trust. Specifically look for the term ‘80G'.

Earlier the 80G status given to trusts had limited validity and required renewal. This is no longer the case, unless the tax authority specifically states such a requirement. You will, therefore, do well to ask for a copy of the certificate to know if such a condition is mentioned. Some organisations will give you a plain receipt and then follow it up with the 80G stamped receipt. The latter, in original, is what you need to submit at the time of filing your tax returns.

Barring certain donations to government sponsored funds (for which you can produce proof to your employer along with other investment proof that you submit) such as to the Drought Relief Fund, your employer will not take into account the eligible donation for calculating the tax to be deducted regularly from your salary, also called TDS.  While this is a limitation, you don't have to limit the joy you derive from giving.

COMMENT NOW