How to Maximize Tax Benefits with Section 80G of the Income Tax Act?

Section 80G of the Income Tax Act provides taxpayers with the opportunity to avail deductions on donations made to specified funds and charitable institutions. This provision aims to incentivize philanthropy and support various social causes, encouraging taxpayers to contribute to nation-building efforts. Understanding the eligibility criteria, exclusion rules, deduction limits, documentation requirements, and the scope for online donations to help taxpayers maximize their tax benefits with Section 80G while making meaningful contributions to society.

Eligibility for Deductions under Section 80G:

Eligible taxpayers, including individuals, companies, firms, Hindu Undivided Families (HUFs), Non-Resident Indians (NRIs), and others, can claim deductions under Section 80G. This broad eligibility criterion ensures that a wide range of taxpayers can benefit from this provision. However, only donations to funds or institutions approved by the Income Tax Department qualify for deductions. These approved institutions are typically engaged in activities that promote social welfare, education, medical relief, and other charitable purposes.

To determine whether a donation is eligible for deduction, taxpayers should verify if the recipient institution has been granted approval under Section 80G by the Income Tax Department. This approval is usually indicated on the donation receipt provided by the institution. The institution’s approval status can also be cross-checked on the Income Tax Department’s official website.

It’s important to note that this deduction is available only to taxpayers who have chosen the old tax regime. Those who opt for the new tax regime are not eligible to claim this deduction.

Donations to specific funds, including the Jawaharlal Nehru Memorial Fund, Indira Gandhi Memorial Trust, and Rajiv Gandhi Foundation, are no longer eligible for deductions under Section 80G. This change applies to contributions made on or after April 1, 2023.

Exclusion from Deductions under Section 80G:

It’s important to note that donations made in-kind or exceeding Rs 2,000 in cash do not qualify for deductions under Section 80G. This rule promotes transparency and traceability of donations, ensuring that the flow of funds can be monitored and accounted for. By restricting cash donations, the provision aims to curb the misuse of funds and enhance the credibility of the donation process.

In-kind donations, such as the donation of goods or services, do not qualify for deductions under Section 80G. The rationale behind this exclusion is the difficulty in valuing and verifying such donations accurately. Instead, only monetary donations, made through cheque, bank transfer, or digital payment methods, are eligible for deductions. This encourages donors to contribute in a manner that is easily traceable and verifiable, thereby reducing the risk of fraud and ensuring that the funds are used for their intended purposes.

What are the Deduction Limits under Section 80G?

Deductions under Section 80G can be either 100% or 50% of the donated amount, depending on the fund or institution. Specifically, there are four types of deductions available:

• 100% Deduction Without Any Maximum Limit: Donations to certain relief funds, such as the Prime Minister’s National Relief Fund, qualify for a 100% deduction without any upper limit.
  
• 50% Deduction Without Any Maximum Limit: Donations to some charitable organizations qualify for a 50% deduction without any upper limit.

• 100% Deduction Subject to a Maximum Limit: Certain charitable donations allow for a 100% deduction, but with a maximum limit set on the deductible amount.

• 50% Deduction Subject to a Maximum Limit: Donations to various charitable institutions may qualify for a 50% deduction, subject to a specified maximum limit. [Source: Economic Times]

The extent of the deduction is determined by the nature and objectives of the recipient institution.

For example, if an individual donates ₹10,000 to a charity eligible for 100% deduction, their taxable income is reduced by that amount, potentially saving them thousands in taxes depending on their tax bracket.

Additionally, some donations are subject to a limit of 10% of the taxpayer’s adjusted gross total income. This means that the total eligible deduction cannot exceed 10% of the donor’s adjusted gross income for the financial year. Any excess donation amount that exceeds this limit cannot be claimed as a deduction in the current year but can be carried forward to subsequent years, subject to the same limit.

The differentiation in deduction limits is designed to prioritize contributions to institutions and causes that are deemed to have a significant impact on society. By offering a higher deduction rate for certain donations, the government aims to channel more funds towards critical areas such as disaster relief, healthcare, and education.

How to Calculate the Amount of Deductions Under Section 80G?

Let’s assume your gross total income for the year is Rs. 12 lakh. You have made donations of Rs. 1,20,000 to charitable institutions, which are eligible for a 50% deduction subject to a qualifying limit of 15%. Additionally, you have claimed deductions of Rs. 2 lakh under Section 80C and earned short-term capital gains of Rs. 50,000 from the sale of equity shares.

To calculate the maximum amount allowable under Section 80G, follow these steps:

Compute Your Adjusted Gross Total Income (AGTI): Start by reducing your gross total income (GTI) by the deductions under Section 80C and short-term capital gains under Section 111A.

Adjusted Gross Total Income= Gross Total Income − Deductions under Section 80C − Short-term Capital Gains

=12,00,000 − 2,00,000 − 50,000 = 9,50,000

Calculate the Qualifying Limit for Donations under Section 80G: This is 15% of your adjusted gross total income.

Qualifying Limit=15% of 9,50,000 = 1,42,500

Determine the Maximum Amount Allowable under Section 80G: The maximum allowable deduction is 50% of the lower of the amount donated or the qualifying limit.

Maximum Amount Allowable=50% of the lower of (1,20,000 or 1,42,500)

=50% of 1,20,000 = 60,000

Therefore, the maximum deduction allowable under Section 80G for the donations made to eligible charitable institutions is Rs. 60,000.

What are the Documents Required to Claim Deductions under Section 80G?

Claiming deductions under Section 80G requires taxpayers to furnish specific details in their income tax returns, including the name, PAN, and address of the donee, along with the amount contributed. Proper documentation is essential to substantiate the claim and ensure compliance with tax regulations.

Taxpayers must obtain a receipt from the donee institution, which includes these details and the registration number issued by the Income Tax Department. The receipt serves as proof of the donation and is necessary for claiming the deduction. It is advisable to retain this receipt and other related documents, such as bank statements or payment confirmation emails, for future reference and in case of any scrutiny by tax authorities.

Are Online Donations Eligible for Deductions Under Section 80G?

In alignment with the government’s push towards a digital economy, donations made through online platforms and digital payments are eligible for deductions under Section 80G. This move simplifies the donation process and encourages more people to contribute to charitable causes using secure and convenient payment methods.

Online donations offer several advantages, including ease of transaction, instant confirmation, and enhanced transparency. Digital payment methods also provide an electronic trail, making it easier to track and verify donations. Taxpayers can donate through various online platforms, such as websites of charitable institutions, crowdfunding platforms, or payment gateways that facilitate charitable contributions.

By embracing digital payment methods, taxpayers can not only avail tax benefits but also support the government’s initiative to reduce cash transactions and promote financial transparency. The increasing popularity of online donations reflects a broader trend towards digitalization in financial and philanthropic activities.

Conclusion

Understanding the nuances of Section 80G can lead to significant tax savings while supporting charitable causes aligned with one’s values and priorities. Proper documentation and adherence to eligibility criteria are essential for claiming these deductions. By taking advantage of the provisions under Section 80G, taxpayers can contribute to the betterment of society and promote social welfare.

In addition to the tax benefits, donating to approved charitable institutions under Section 80G fosters a culture of giving and social responsibility. It allows taxpayers to play an active role in addressing various social challenges and supporting initiatives that drive positive change. Whether it’s contributing to disaster relief efforts, supporting education and healthcare, or funding social welfare programs, donations made under Section 80G have a far-reaching impact.

These tips are brought to you by HappyWise Financial Services.

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Disclaimer: Some part/s may be generated/modified using GenerativeAI