Understanding Donation Tax Benefits in India

01/05/24

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Donations and charitable contributions play an important role in society. They allow individuals to support causes they care about and make a tangible impact. Rather than handing out small sums at the spur-of-the-moment based on emotional appeal, making a structured donation allows one to make a more substantial and well-thought-out contribution to a cause that matters to them. In addition, donating to registered organisations also enables one to access tax-saving benefits. 

In incentivising donations, the government recognises the charitable instinct of people and communities; mobilized at scale, this kindness can catalyse significant change by empowering NGOs to do more for beneficiaries. This is why the Indian government provides tax exemptions on certain donations to encourage more giving. Whether you are a new taxpayer or someone considering a more structured way to look at personal finance, it is important to understand how an NGO donation tax exemption works, and this article will provide an in-depth explanation of this topic.

Which Donations Qualify for Tax Exemption?

Not all donations qualify for tax exemption under Indian tax law. The recipient must be an approved and registered charitable organisation that is formally eligible for NGO donation tax exemption. Secondly, it must not offer the donor any form of consideration or benefit in return. A donation is an act of kindness – and nothing more. Also, donations must be made via cheque, draft, cash, bank transfer, or approved modes, and tax exemption is eligible for up to Rs. 2000 in a particular financial year.

Deduction Limits and Calculations

A donation tax exemption is intended to reduce one’s taxable total income. This means that the total income upon which income tax is levied is effectively reduced. A simple way of understanding is remembering that total income minus deductions equals the taxable income. At the same time, one must remember that it is intended to be a small incentive – and should not be seen as the primary reason for donation. This is why for some kinds of donations (i.e., to approved charitable organizations, government relief funds, etc. one can claim a deduction of only up to 10% of the gross total income).

Documentation Required

To claim tax exemption on donations, you must provide documentation such as the charity’s receipt with their PAN/TAN details. For large donations above Rs. 10,000, additional proof may be required. Maintain proper records for at least 8 years before discarding. Donating to charitable causes provides monetary help to organizations doing good work.

 The Indian government understands that civil society organisations do not formally create any goods or services that they can monetise. These organisations, therefore, must rely on donations to fund their operations. The considerable size, scale, and depth of NGO operations – a facet of their work that has been recognised by the government – make them capital-intensive. The swiftness at which relief work must sometimes be carried out also means that these organisations must be ever-ready to mobilise funds and resources.  

 For example, Bal Raksha Bharat (also known as Save the Children) is committed to offering better education, health care, and economic opportunities to children. All these areas of intervention and work are capital-intensive by nature, as they require facilitating infrastructure and manpower on the ground. Whether it is supporting schools with new infrastructure or new equipment, the expenses can be immense. The capital-intensive nature of the work of the development sector can necessitate a constant lifeline of funding, of which donations by individuals are a key component.

A donation tax exemption is one of the most powerful and effective ways of promoting the spirit of giving by allowing tax exemptions on certain donations. Now that you understand the deduction limits and rules, you can keep track of eligible donations. A little generosity goes a long way. As the tax season comes closer, it is important to organise one’s finances accordingly and transparently to maximise the benefits of effective financial planning. Donations, if organised and structured effectively, can be one of the many ways that someone can both give back to society and practice better personal finance.

Pulkit Arora

Manager-Brand & Communication

“With over 12 years of dedicated experience in the social development sector, I am passionate about championing child rights and community empowerment through innovative communication strategies. As a Digital Marketing Manager for digital Campaigns and Communication with Bal Raksha Bharat (Save the Children), I have honed my expertise in orchestrating impactful campaigns online and fostering partnerships with key stakeholders to drive positive change."