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The tax laws are used to promote your donating for public causes. If you feel altruistic and donate your money for public purposes to approved institutions, you get a deduction in computing your taxable income. Your income reduces and so does your tax because of the donation. Because you get an advantage by fulfilling your personal, altruistic desires, government wants to make sure you at least spend the money on worthy causes. Tax law has, therefore, put in conditions based on which alone the deduction will be allowed to you.
The conditions imposed are that:
- You should have a positive Gross Total Income (income before deductions) for you to be eligible to claim the tax benefit;
- You should make donations in cash - donations in kind don't get you tax deductions;
- The donations should be to specified institutions.
- The tax deduction cannot be more than the specified limit.
You can't simply spend money feeding the poor and claim a tax deduction. You should be making the donation only to eligible institutions.
There are two types of eligible institutions:
- those which are named in the law
- those which fall in the general category.
The named institutions are like the National Defence Fund, Central Welfare Fund of the Army, Air Force and the Navy, Prime Minister's National Relief Fund, National Children's Fund, Indira Gandhi Memorial Trust, Rajiv Gandhi Foundation, National Foundation for Communal Harmony, Chief Minister's Relief Fund, AP Chief Minister's Cyclone Relief Fund etc. Besides, approved universities and educational institutions are eligible. Some notified temples, mosques, gurudwaras, churches or other places are also eligible to receive tax-deductible donations for renovation or repair purposes. Of course, these are not the only funds to which deductions are allowed to take tax advantages. You and I may also set up and manage charitable/not-for-profit institutions and get donations. Activities by NGOs (non-governmental agencies) are welcome. Donations to privately owned and managed charitable organisations are also eligible for tax deduction if they fulfil conditions.
The conditions are:
- the trust or organisation should be registered with the tax department as a charitable organisation or should be exempt as educational or other institution;
- the trust should not be for religious purposes;
- the trust should get its accounts audited;
- the trust should be doing genuinely charitable activities;
If it so does, the Trust can obtain a certificate making it eligible to deduction under section 80G. Donations to such a trust or institution will then be eligible to the deduction.
To most institutions and trusts, donations in excess of 10% of your Gross Total Income (income before claiming various deductions) have to be ignored. Thus, 10% of the Gross Total Income would be the net qualifying amount of donation.
You generally get a deduction of 50% of the net qualifying amount of donation made, not the entire donation.
Broadly speaking, half your donations are allowed as deduction in computing your taxable income if the total donations made by you are 10% of the Gross Total Income or less.
However, there are several named institutions to whom you may make any amount of donation and the entire donation would be eligible to deduction. For instance, during the war last year donations to Army Central Welfare Fund was allowed as deduction 100%. There are others as well which have this special status like the Prime Minister's National Relief Fund etc. The 10% ceiling does not apply to donations to these institutions.
There are other institutions as well to whom the 10% ceiling does not apply.
When you want to make donations, you should check out:
- if the institution is one to which 10% limit applies
- if the institution is one, donation to whom is eligible for deduction at 50% or 100%
- if the institution is one which is a named institution or has a certificate of eligibility under section 80G.
If, on the other hand, you desire to do charity do set up a trust yourself and get itself registered as one with the tax department. Your charity will get you tax breaks.
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