The tax laws are kind to those who donate. Yes, if you have made a donation in cash (not kind), you should examine the provisions of section 80G of the Income Tax Act, 1961, which may provide you some tax relief. You should understand two elements: basic prescribed limit and limits for individual donations.
Basic prescribed limit: The maximum amount that you can donate to eligible charities, to get tax benefits is limited to 10% of your gross total income reduced by other deductions available under the Act (from section 80C to 80U), which are wide ranging and include PF contribution, LIC premium to name a few. However, certain donations, like those to the National Defence Fund and PMs National Relief Fund are not subject to this limit.
Limits for individual donations: Further, the quantum of tax deduction also depends on the institution to which the donation is made. Not all donations are eligible for a 100% tax relief. For instance, if you have donated to a local orphanage, which has obtained an 80G approval, only 50% of the donation would be subject to tax relief. Further, it would also fall within the basic prescribed limit criteria (refer table).
Let us consider an illustration. Sharon decided on an impulse to donate to a local orphanage. Fortunately, the orphanage had got an 80G approval entitling her to claim the tax break. But Sharon could only get a part of the donation as a tax break. Here is the math:
Her gross total income, as explained above, was Rs 5 lakh. She made a donation of Rs 1 lakh. However, 10% of her gross total income works out to just Rs 50,000. Against this Rs 50,000 (which is the maximum limit up to which she can claim a deduction, even though her actual donation is Rs 1 lakh), she will get a deduction of only 50%. Thus the deduction for her will be Rs 25,000.
However, if Sharon had purchased furniture, she would have lost out on this limited benefit. Donations in kind are not eligible for deduction under the Act. Sharon should also ensure that she gets the receipt of the donation given by her, and also obtain a copy of the certificate under section 80G of the Act. There has been one major change in the tax laws relating to donations.
With effect from April 1, 2006, the government has taken steps to restrict secret donations. This is done by enacting specific provisions to deem the anonymous donation as income taxable at a maximum marginal rate of 33.99% in case such donation is got by a university, educational institution, hospital or trust. It appears that this amendment can curb flow of unaccounted money.
So make sure you get a proper receipt in your name when you make a donation. This will not only help you, but also the institution, to which you are making the donation.
Mayur Desai & Umang Shah (Ernst & Young)
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