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Charitable deduction
April, 28th 2007

Newspapers have carried reports about donations made to the T.T. Devasthanam Trust for education of poor children and setting up hospital facilities by a popular cine star and his two friends of Rs 51 lakh each ahead of the cine star's son's wedding. The gestures of the donors are no doubt laudable. However, out of the donations made, about 34 per cent will come back to the donors in the form of income-tax benefit and hence, to that extent, the donations are subsidised by the Central Government.

The Income-Tax Act, 1961 provides tax benefit for donations made for charitable purposes. The Act defines `charitable purpose' to include "relief of poor, education, medical relief and advancement of any other object of general public utility". Thus, the donations made by the three persons come within the definition of `charitable purpose' as defined in the I-T Act.

The I-T Act gives two-fold tax benefits for such donations. These relate to:

i) Recipients of the donations whose activities are for public benefit. The I-T Act exempts such donations from tax;

ii) Those who make the donations also get income-tax benefit. The Government foregoes revenue for services, which it is expected to provide itself by direct spending for the benefit of the community.

Tax benefits to donors

Under Section 80G of the I-T Act, donors are entitled to deduction in computation of their taxable income up to 100 per cent of the amount of donation. Full deduction is admissible to institutions/organisations mentioned in Section 80G(2) of the I-T Act. In other cases, deduction of 50 per cent of the amount donated is permissible.

For the donors to claim benefit under Section 80G, the donor organisations have to be approved by the Commissioner of Income-Tax (CIT) under Section 80G. The conditions to be satisfied are mentioned in the Section. It is unlikely that TTD Trust does not satisfy the conditions mentioned in the Section and is not recognised under Section 80G.

If the TTD Trust falls under Section 80G(1)(iv), it will be entitled to 100 per cent deduction, which would mean that each donor's tax liability would get reduced by Rs 17,33,490 (that is, 33.99 per cent of Rs 51 lakh), meaning thereby that the actual donation will be Rs 33,66,510 only in each case. If the donation is eligible for 50 per cent deduction, the tax benefit will be Rs 8,66,745 in each case and the actual donation will be Rs 42,33,255.

To the extent, the exchequer loses tax, the donations could be said to be subsidised by the Government. However, since the money goes to advance the noble purposes, such public-private partnerships should be welcome.

T.N. Pandey
(The author is a former chairman of CBDT.)

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