Graphic: Ahmed Raza Khan
Graphic: Ahmed Raza Khan

Financial gains in giving

Tax rebate to individuals and institutions who give money for charitable purposes acts as a great motivator for philanthropy, say experts

New Delhi: Charity benefits givers as well, and in ways that go beyond the moral and emotional. Contributions made for charitable purposes in India are eligible for tax exemptions under the Income Tax (I-T) Act, 1961.

These exemptions influence donor decisions—be they individuals or companies—and encourage philanthropy, believe experts. 

To understand some trends in the giving space, Thinkthrough Consulting (TTC), a social sector financial services and consulting firm, analysed the revenue foregone documents of Union budgets for the last few years. The data gleaned indicates a sharp increase in money given to charitable bodies by corporate entities. 

The most popularly claimed deductions for charitable purposes under the I-TAct are those under clauses 80G and 35AC. Donations to not-for-profit organizations, if recognized as charitable by the I-T department under one or both clauses, are tax exempt to various extents. Donors can seek a tax rebate of 50% under 80G and 100% under 35AC.

Clause 80G is applicable to charitable organizations recognized by the I-T department to be working for public good. Under this, donors can avail a 50% tax deduction if their donations meet specified conditions. Clause 35AC is applicable to specific projects of specific organizations which have to be approved by the central government and are reviewed periodically by a standing committee. Under this, donors can get a 100% tax deduction. 

According to TTC’s analysis, donations given by companies in FY14 under 80G added up to Rs1,013.4 crore, while those by individuals came to Rs737.4 crore. In FY15, these amounts jumped to Rs1,984.52 crore for companies and Rs876.28 crore for individuals. It is projected in the budget documents that in FY16, donations qualifying for 80G deduction will be close to Rs2,095.66 crore for companies and Rs975.86 crore for individuals. 

Similarly, under 35AC, which is not applicable to individuals, deductions in FY14 amounted to Rs143.5 crore, jumping to Rs747.34 crore in FY15.

These sharp increases in charitable donations may be linked to the implementation into force of Corporate Social Responsibility (CSR) Rules in 2014, though the rules by themselves do not allow for a tax rebate. But the act of funding charitable organizations and certain social or rural development initiatives continue to be covered by the I-T Act.

To implement CSR initiatives, often companies partner with or set up their own not-for-profit or charitable organizations, as permissible under the rules. Initially there was lack of clarity on the issue of claiming tax deduction, but in FY15 the ministry of corporate affairs said that if CSR activities come under any other law that allows for tax benefits, it has no say in the matter, as Mint has reported previously. 

Vijay Ganapathy, chief operating officer and partner at TTC, said, “Individual contributions seeking tax deductions under 80G have not increased at the same pace as those of companies. This could be due to a number of reasons—from people giving less money to anonymous donations to smaller sums of money given by individuals. As for the sharp increase in donations from companies, it appears to be influenced by the CSR Rules." 

Ganapathy added the caveat that the money given to charitable organizations or for social development activities may not all be part of CSR budgets, because not all companies claim tax benefits for CSR funds. 

Not-for-profit organizations like HelpAge India, working for the cause of the elderly, have seen a sharp increase in contributions from corporates in the last couple of years. Contributions from companies to the organization went from Rs19 crore in FY15 to Rs33 crore in FY16.

But Mathew Cherian, chief executive of HelpAge India, said the organization continues to be largely dependent on individual donations. Of its Rs102 crore budget in FY16, it received more than 60% from individual donations, said Cherian, adding that more than 40% of its donors seek tax exemptions under 80G and 35AC.  

But the motivator of tax deductions has come under a cloud following the finance ministry’s announcement in the FY16 budget that clause 35AC will be slowly phased out, beginning FY17.

Puja Marwaha, CEO of not-for-profit Child Rights and You (CRY), expressed concern regarding the removal of deductions under clause 35AC for not-for-profits. “Globally, tax exemptions encourage more people to give money, especially since the benefits are two pronged—you get to do good as well as get tax rebates," she said.

With roughly 200,000 donors giving money to CRY annually, Marwah said the removal of 35AC exemption could dramatically shrink the philanthropic space, a point borne out by TTC. As the firm’s analysis shows, contributions made to organizations with a 35AC certification have seen a sharp increase in the last couple of years—from Rs143.5 crore in FY14 to Rs747.34 crore in FY15.   

But some like Vidya Shah, CEO of EdelGive Foundation, the philanthropic arm of Edelweiss Financial Services, said loss of tax rebate is not a great cause for concern. “Tax benefits play some part in encouraging people to give money for philanthropy. But they cannot be said to be the primary motivation for giving money towards philanthropic work," Shah stressed. 

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