How to Claim Tax Deduction on Donation Under Income Tax Act,1961?

Donating to charity is an act of serving society. The government extends its full support towards charitable services by providing tax deductions on the amount of Donations made. Section 80G of the Indian Income Tax Act, 1961 enables tax payer to claim Income tax deductions for contributions to certain relief funds and charitable institutions.

 Donations made to certain funds, charitable institutions, and other organizations can provide significant tax benefits under the Income Tax Act, 1961. Cash donations are straightforward, but non-cash donations (like property or stocks) have specific rules regarding valuation and the required documentation.

Read More:  Income Tax department clarifies Donations for Ram Mandir eligible for Income Tax deduction

Who is Eligible for Deduction?

Donations to certain organizations can be deducted from your taxable income, providing potential tax benefits. Donations must be made to qualified charitable organizations, such as nonprofit groups, religious organizations, and certain educational institutions. The IRS provides a tool to check the eligibility of an organization. Eligibility for income tax deductions on donations typically applies to individuals and entities that meet certain criteria.

• Individuals: Individuals who itemize their deductions on their tax returns can claim charitable contribution deductions. Using Schedule A of Form 1040 instead of taking the standard deduction, the individuals can avail deduction.
• Corporations: Businesses/Cooperates can deduct charitable contributions, usually up to 10% of their taxable income. This includes C corporations, but the rules for S corporations, partnerships, and LLCs can be more complex.
• Trusts and Estates: Trusts and estates that file Form 1041 can deduct charitable contributions under certain conditions.
• Self-Employed Individuals: Self-employed individuals can deduct donations as part of their itemized deductions on their personal tax returns.

It is important to note that there are Adjusted Gross Income (AGI) Limits that can be deducted for charitable contributions. Generally, this limit is 60% of AGI for cash contributions to public charities, but it can be lower for other types of contributions and organizations. To be eligible for a deduction, donations must be made to qualified organizations, which are usually non-profits recognized by the IRS under section 501(c)(3) of the Income Tax Act, 1961.

Documents Needed for Deduction

Adequate records and documentation are necessary for the IRS to validate the deductions. For larger donations, especially non-cash items, more detailed records or appraisals may be required.

• Receipt from the Donee Organization: The receipt should contain the name, address, PAN, and registration number of the trust or institution, along with the name of the donor, the amount donated, and the mode of payment.
• Form 58A (if applicable): For donations eligible for 100% deduction with qualifying limit, Form 58A must be issued by the donee organization, containing details of the project or scheme for which the donation is utilized.
• Copy of the Registration Certificate of the Donee Organization: The donee organization should be registered under Section 80G, and the copy of the registration certificate should be available.

Statutory Provisions and Special Rules

There are special rules for certain types of donations, such as those made to veterans’ organizations, fraternal societies, or for educational purposes.

• Section 80G – Deduction on Donations to Charitable Institutions: Applies to all taxpayers, including individuals, HUFs, companies, and firms.

100% Deduction Without Qualifying Limit was eligible on donation towards National Defence Fund set up by the Central Government, Prime Minister’s National Relief Fund, Prime Minister’s Armenia Earthquake Relief Fund, Africa (Public Contributions – India) Fund, National Foundation for Communal Harmony, Approved university or educational institution of national eminence etc.

50% Deduction Without Qualifying Limit, was eligible on Jawaharlal Nehru Memorial Fund, Prime Minister’s Drought Relief Fund, Indira Gandhi Memorial Trust and Rajiv Gandhi Foundation

• 100% Deduction Subject to Qualifying Limit: Donations to the government or any approved local authority, institution, or association to be utilized for promoting family planning.
• 50% Deduction Subject to Qualifying Limit: Donations to any other fund or institution which satisfies conditions mentioned under Section 80G.

Qualifying Limit:

The qualifying limit is 10% of the adjusted gross total income, which is the gross total income (excluding long-term capital gains and short-term capital gains under section 111A) reduced by deductions under Sections 80C to 80U (except Section 80G).

• Section 80GGA – Deduction on Donations for Scientific Research or Rural Development: section provides 100% Deduction on Donations to approved scientific research associations or institutions, Donations to universities, colleges, or other institutions approved for scientific research, Donations to an approved institution for research in social science or statistical research, Donations to associations or institutions engaged in rural development., Donations to public sector companies, local authorities, or associations approved for carrying out projects or schemes for promoting the social and economic welfare of, or the upliftment of, the public in rural areas. Donations to the National Urban Poverty Eradication Fund were set up and notified by the Central Government.

Example:

Suppose an individual has a gross total income of ₹10,00,000 and makes the following donations:

₹50,000 to the Prime Minister’s National Relief Fund (100% deduction without qualifying limit).

₹30,000 to an approved university for scientific research (100% deduction without qualifying limit).

₹20,000 to a local NGO engaged in rural development (100% deduction subject to qualifying limit).

The deductions would be:

Prime Minister’s National Relief Fund: ₹50,000 (100% deduction without qualifying limit).

Approved university for scientific research: ₹30,000 (100% deduction without qualifying limit).

Local NGO: ₹20,000 (100% deduction subject to qualifying limit, maximum up to 10% of adjusted gross total income).

Adjusted Gross Total Income (AGTI) = ₹10,00,000

Qualifying Limit (10% of AGTI) = ₹1,00,000

• Section 35 of the Income Tax Act, 1961: This section deals with the deductions for donations made to scientific research and rural development projects.
• Section 35(1)(ii) – Scientific Research Associations or Universities, Colleges, or Other Institutions for Scientific Research: 150% Deduction claimable on contribution to an approved scientific research association, university, college, or other institution to be used for scientific research. The deduction was 150% till 31st March 2020. For contributions made from 1st April 2020 onwards, the deduction is reduced to 100%.
• Section 35(1)(iii) – Research in Social Science or Statistical Research: 150% Deduction is allowable on contribution to an approved research association, university, college, or other institution to be used for research in social science or statistical research. The deduction was 150% till 31st March 2020. For contributions made from 1st April 2020 onwards, the deduction is reduced to 100%.
• Section 35(1)(iia) – Contribution to a Company for Scientific Research : 100% Deduction is eligible on contribution to a company registered in India, which has as its main object the scientific research and development, and is approved by the prescribed authority.
• Section 35(2AA) – Payment to National Laboratory, University, IIT, or Specified Persons: 150% Deduction allowable on payment to a national laboratory, university, Indian Institute of Technology (IIT), or any other specified person to be used for scientific research under an approved program. The deduction was 150% till 31st March 2020. For contributions made from 1st April 2020 onwards, the deduction is reduced to 100%.
• Section 35(2AB) – In-House Research and Development Expenditure by Companies: 150% Deduction allowable on any expenditure (not being in the nature of cost of any land or building) incurred on scientific research (on in-house research and development facility) by a company engaged in the business of biotechnology or in the business of manufacture or production of any drugs, pharmaceuticals, electronic equipment, computers, telecommunication equipment, chemicals, or any other notified products. The deduction was 150% till 31st March 2020. For expenditure incurred from 1st April 2020 onwards, the deduction is reduced to 100%.

Steps to Claim:

1. Collect all receipts, acknowledgements, and other necessary documentation for your donations.
2. Enter your total donations on Schedule A of Form 1040.
3. If applicable, attach Form 8283 for non-cash contributions.
4. File your completed Form 1040, Schedule A, and any additional forms with the IRS by the tax deadline.

Case Laws

In Batuk Vithalabhai Donga vs ITO  CITATION:   2023 TAXSCAN (ITAT) 255 , the bench of Waseem Ahmed (Accountant Member) and Sidhhartha Nautiyal (Judicial Member) of Rajkot Income Tax Appellate Tribunal (ITAT) ruled that no addition shall be made under section 69A of Income Tax Act, 1961 on the ground of denial of deduction under section 80G. The bench observed that the assessee has not challenged the additions made by the AO under section 80U and 80G of the Act, but has only challenged the computation of tax liability by the AO under section 115BBE of Income Tax Act.

The tribunal emphasized that the section 69A of Income Tax Act can only be used in the event that the assessee is discovered to be the owner of any money, bullion, jewelry, or other valuable item that is not recorded in the books of account and the assessee makes no attempt to explain the nature and source of acquisition of such money, bullion, jewelry, or other valuable articles.

In Lady Meherbai D. Tata Education Trust vs Commissioner of Income Tax CITATION:   2023, The Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ), ruled that the Principal Commissioner of Income Tax ( PCIT ) cannot order conditional approval under Section 80G of the Income Tax Act, 1961. The role of the PCIT while according registration and approval under section 12A and 80G is only to make himself satisfied about the genuineness of the activities to be carried out by the assessee trust and compliance of such requirement of any other law for the time being in force by the trust or institution material to achieve its object and then to accord the registration and approval. The Counsel for the Revenue also contended that when the assessee trust itself moved an application for granting provisional approval as form 10AC only talks about “provisional approval”, the PCIT/CIT was well within his right to impose the conditions.

In Commissioner Of Income Tax, (Exemption) Kolkata Vs Vijay Kumar Bajoria Foundation  CITATION:   2022 TAXSCAN (HC) 952, the Calcutta High Court (HC) has held that registration of trust under section 12AA  of the Income Tax Act,1961 is valid when the object of the Trust is charitable in nature and allowed the Exemption u/s 80(G)(S)(vi) of the act. The Commissioner of Income Tax (Exemption), Kolkata [CIT(E)] rejected the application filed by Vijay Kumar Bajoria Foundation, the assessee for registration under Section 12AA of the Act on the ground that the assessee was not carrying on any charitable activity. Justice T S Sivagnanam and Justice Hiranmay Bhattacharyya observed that the Tribunal had rightly pointed out that no material was produced by the assessee therein to show that it carried out any charitable activity.

Conclusion

Donations to eligible funds and institutions can provide significant tax benefits under Sections 80G and 80GGA of the Income Tax Act. While filing income tax returns, understanding the provisions that allow for tax deductions can help taxpayers optimize their tax liability. By understanding the eligibility and following the necessary steps, individuals and entities can reduce their income tax liability.

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