On donations and tax concession

There is a famous saying by Anne Frank that “No one has ever become poor by giving”. Following this motto, both individuals and businesses are actively contributing towards social causes, in an endeavour to give back to the society. The government has also tried to play its part and encouraged this act of giving by providing tax concessions to taxpayers, who make contributions for any benevolent cause. This article highlights some of the key provisions under the Indian Income-Tax Act, 1961 dealing with donations.

Deduction in respect of donation to certain funds, charitable institutions

It is possible to claim deduction for any amount donated to specified funds and charitable institutions. However, one must remember that any donation made to foreign trusts do not qualify for deduction. The deduction can be claimed when the contribution is made through a cheque or a draft or in any other electronic mode or in cash. Donations made in cash exceeding ₹2,000 are not considered for the purpose of deduction. Similarly, any contributions in kind such as food, clothes, medicines are also not eligible.

This benefit can be utilized by all categories of taxpayers viz. individuals, companies, firms etc. regardless of their residential status i.e. resident or non-resident, subject to certain conditions.

It is important to note that not all donations are eligible for 100% deduction. There are some restrictions on quantum of deduction which must be kept in mind. Some donations are eligible for 100%/50% deduction without any maximum limit, while others are subjected to an upper cap of 10% of Adjusted Gross Total Income (GTI).

Categories of deductions

1. 100% deduction without restriction - This category of deduction provides maximum tax benefit to the taxpayer. The taxpayer can claim deduction for the full amount of donation. Donations to National Defence Fund, the Prime Minister’s National Relief Fund and the National Children’s Fund fall in this category.

2. 50% deduction without restriction - Some donations are eligible for deduction to the extent of 50% of the amount donated. Donations to Prime Minister’s Drought Relief Fund comes in this category. Thus, deduction can be claimed for 50% of the donation amount without any restriction on upper limit.

3· 100% deduction with restriction - Any donation made to the government or any approved local authority, institution or association for the purpose of promoting family planning is eligible for 100% deduction subject to a ceiling of 10% of adjusted GTI of the taxpayer.

Contributions made to the Indian Olympic Association or any other approved sports association or institution are also eligible for deduction under this category. However, this benefit is only available for companies.

4· 50% deduction with restriction - Donations made to the government or any approved local authority for any charitable purpose (other than promotion of family planning), renovation or repair of any notified place of worship etc., are eligible for 50% deduction subject to a ceiling of 10% of adjusted GTI of the taxpayer.

Claiming deduction for donations

The taxpayer is required to fill in details of the donee in the income-tax return for availing deduction. These details include name, address, Permanent Account Number (tax identification number), amount of donation etc.

The Union Budget 2020 has proposed to simplify this process and make this claim hassle-free for the taxpayers. Accordingly, the donee’s information would be pre-filled in the donor’s income-tax return on the basis of information of donations furnished by the donee.

Can donations be made part of corporate social responsibility (CSR) programme?

The Companies Act, 2013 which regulates the companies in India had introduced mandatory CSR contributions for prescribed companies. These CSR expenses incurred are however, not eligible as deductible business expenditure in the tax return. Therefore, companies chose to make donations and disclose the same as part of their CSR activity. This fulfils their obligation of CSR contribution, and also claim the donations made as deductible expenditure, otherwise not available.

The controversy arises that while the donations can be claimed as deduction from the income, CSR expenses are disallowed under the Act. The argument advanced by the tax authorities is that donations are voluntary in nature, while the CSR contributions are legal obligations mandated by Companies Act. It is also contended that the intention of the government was never to allow deduction for CSR expenditure. In their view, this results in subsidizing the CSR expenditure. This has led to tax litigation. Therefore, donations grouped as CSR expenses are generally disallowed at the assessing officer level. A number of representations have been made to the government to favourably consider the CSR expenditure as deductible business expenditure under the domestic tax laws. However, there is no consensus yet.

Is the benefit of donation available to persons who opt for optional tax regime under the domestic tax laws?

The government recently introduced optional concessional tax regime for domestic or new manufacturing companies which forgo certain exemptions and deductions. Corporate tax rates for such companies would be 22% and 15% respectively, plus cess and surcharge, as applicable. Such companies are allowed to claim benefit of deduction on account of any donations made for FY2019-20 but will not be allowed to claim such deduction in subsequent years.

Similar optional regime was also introduced for individuals and Hindu undivided family (HUF), who forgo certain exemptions and deductions. The taxpayers opting for such regime will not be permitted to claim deduction on account of donations.

Covid relief for donations: Extension of due dates for claiming deduction

Generally, deduction for donation for a particular year can be claimed only on donations made during the said year i.e. on or before 31 March. In view of the pandemic, the government has extended the last date for making donations for financial year FY20 from 31 March 2020 to 31 July 2020. Therefore, the taxpayer can claim deduction for FY20 for all donations made till 31 July 2020.

Donation to political parties or electoral trust

Indian companies and specified persons are also allowed to claim deduction of any contribution to a political party or electoral trust. However, contributions made in cash are not eligible for deduction.

Donations to deal with covid-19 pandemic

Keeping in mind the need for having a dedicated national fund with the primary objective of dealing with any kind of emergency or distress situation, like the covid-19 pandemic, a public charitable trust under the name of Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) has been set up. Donations to PM CARES Fund would qualify for 100% deduction. Further, such donation would also qualify as CSR expenditure for the purpose of the Companies Act, 2013.

To avoid misuse of these beneficial provisions, some safeguards have also been built into the Income Tax Act. In case a donee’s income includes anonymous donation i.e. person receiving donation does not maintain a record of the identity of the donor, such income is chargeable to tax at the rate of 30%, in a prescribed manner. However, such provisions do not apply to trust or institution established wholly for religious and charitable purposes.

It is thus important for any taxpayer making any donation for a social cause, to be aware of these beneficial provisions of the Act. This would enable him to claim tax relief in respect of such donations, while meeting its social obligations.

CA Piyush Mohan Thakur and CA Banu Chander contributed to this article.

Vikas Vasal is national leader-tax at Grant Thornton Bharat LLP