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Charitable Donations and their Legality

Charitable donations in India are contributions made by individuals, companies, or organizations to support a cause, charity, or non-profit organization. These donations help fund various social, educational, health, and environmental projects, playing a crucial role in helping people in need and improving communities.

Charitable donations in India are well-regulated to encourage people to donate while making sure the money is used for the right purposes.

By following the legal guidelines, donors can contribute effectively while also benefiting from tax incentives.

Tax Benefits for Charitable Donations

In India, the government encourages charitable donations by offering tax benefits to individuals and companies who contribute to recognized charities, trusts, and non-profit organizations. These tax benefits make it easier for donors to support good causes while also reducing their taxable income. Here’s a simple breakdown of how these tax benefits work:

1. Section 80G of the Income Tax Act: Section 80G .

The primary section under which donations are eligible for tax benefits is Section 80G of the Income Tax Act, 1961.

What is Section 80G ?
It allows you to claim a deduction for donations made to specific charitable institutions, funds, or NGOs when you file your income tax return. This means that a part of your donated amount will be deducted from your total taxable income, reducing the tax you owe to the government.
How Much Deduction Can You Get?
The deduction can be either 50% or 100% of the donation amount, depending on the organization you donate to.
For example, Donations to the Prime Minister's National Relief Fund are eligible for a 100% deduction.
Donations to certain other charitable trusts or funds may qualify for a 50% deduction.
With or Without Limit:
With Limit: In some cases, donations are eligible for a deduction up to 10% of your gross total income. If your donation exceeds this limit, you won’t get a deduction for the extra amount.
Without Limit: For specific funds or institutions like the Prime Minister's National Relief Fund, there’s no cap on the deduction, so you can claim 100% of the donated amount.
Example, if you earn ₹10,00,000 in a year and donate ₹1,00,000 to a recognized charity eligible for a 50% deduction, your taxable income will be reduced by ₹50,000 (50% of ₹1,00,000).

2. Section 80GGA – Donations for Scientific Research and Rural Development Section 80 GGA.

If you donate to institutions engaged in scientific research or rural development, you can claim a 100% deduction under Section 80 GGA.

This section is particularly relevant for individuals who do not have income from a business or profession.

Under the Companies Act, 2013, companies above a certain profit threshold are required to spend 2% of their average net profits on CSR activities, which can include donations to charitable organizations.

However, not all CSR spending is eligible for tax deductions. For example, donations to certain funds and NGOs that qualify under Section 80G can be deducted, but general CSR expenses are not always tax-deductible.

4. Section 35AC – For Businesses Section 35AC

This section allows businesses to claim deductions on donations made to projects or schemes notified by the government, such as programs for promoting family planning, infrastructure development, etc.

Donations under Section 35AC are eligible for a 100% deduction.

5. Eligibility and Documentation Requirements

To claim tax benefits on charitable donations, you need to ensure the following:

Donations must be made to eligible organizations that have a valid 80G certificate issued by the Income Tax Department.
Always keep the receipt of the donation. It should include:
1. The name and address of the charity.
2. PAN of the charity.
3. Your name and details.
4. The amount donated.
Donations must be made in cash, cheque, or online transfer. Donations made in cash exceeding ₹2,000 will not be eligible for tax deductions.

6. Important Points to Remember:

Tax benefits are only available if you file your income tax return. If you don’t file, you cannot claim the deductions.
Donations made in kind (goods or services) are not eligible for tax deductions. Only monetary donations qualify.
You should always verify if the organization is registered and eligible under Section 80G before making a donation.

Legal Requirements for NGOs and Trusts

NGOs (Non-Governmental Organizations) and trusts in India play a significant role in driving charitable activities and initiatives. To ensure that these organizations operate ethically and transparently, the government has set up several legal requirements that NGOs and trusts must follow when receiving and utilizing charitable donations.

1. Registration Requirements:

Legal Structure: NGOs can be registered as:

Trusts (under the Indian Trusts Act, 1882 or relevant state laws)
Societies (under the Societies Registration Act, 1860)
Non-Profit Companies (under Section 8 of Companies Act, 2013)
Why Register? – Registration gives the NGO legal recognition, making it eligible to receive donations, access government grants, and offer tax benefits to donors.

2. Income Tax Registration (80G and 12A Certificates)

12A Registration: This allows an NGO or trust to be exempt from paying income tax on funds received as donations. If an NGO is not registered under 12A, all its income is subject to tax. 12A Registration

80G Certificate: This certificate allows donors to claim tax deductions on donations made to the NGO or trust. It encourages more people to donate by offering them tax benefits. 80G Certificate.

How to Get These Certificates? – Apply to the Income Tax Department with the necessary documents, including the registration certificate, financial statements, and details of activities.

These certificates need to be renewed periodically as per current regulations.

3. Maintaining Proper Financial Records:

NGOs and trusts must maintain accurate and detailed records of all financial transactions, including donations received, expenses incurred, and funds utilized for charitable purposes.

Maintaining proper records helps in:

Ensuring transparency
Complying with legal requirements
Building trust with donors and government authorities

Annual Audit: It is mandatory for NGOs and trusts to have their accounts audited by a certified Chartered Accountant. The audited financial statements must be submitted to the relevant authorities.

4. Filing Annual Returns:

Registered NGOs and trusts are required to file annual returns with various government departments:

Income Tax Department: File income tax returns annually even if the organization is tax-exempt.
Registrar of Societies or Registrar of Companies: Societies and non-profit companies need to file annual returns with their respective registration authority.

5. Foreign Contribution Regulation Act (FCRA), 2010: FCRA Regulations 2010

What is FCRA?– The FCRA regulates the receipt of foreign donations by NGOs to ensure they are not used for activities against the national interest.

Registration Under FCRA: NGOs must register under FCRA if they wish to receive foreign contributions. This involves a separate application process and approval from the Ministry of Home Affairs.

FCRA Compliance:

Maintain a separate bank account for foreign contributions.
Submit annual returns (FC-4 Form) detailing foreign funds received and how they were used.
The FCRA certificate must be renewed every 5 years.

6. Utilization of Funds

Purpose: Donations received must be used strictly for the charitable activities and objectives mentioned in the organization's governing documents (trust deed, memorandum of association, etc.).

Administrative Expenses: NGOs should ensure that administrative costs are reasonable and do not consume a major portion of donations, as this can raise concerns about fund mismanagement.

7. Prohibition of Profit Distribution

NGOs and trusts are not allowed to distribute profits or surplus generated from their activities. All income must be used for the organization’s charitable purposes.

8. Goods and Services Tax (GST) Compliance

While NGOs engaged solely in charitable activities are generally exempt from GST, they must register for GST if they engage in commercial activities or provide services like consultancy.

They are required to comply with GST regulations, including filing returns and maintaining records if applicable.

9. Transparency and Public Disclosure

NGOs and trusts should be transparent about their activities and finances. This includes:

Maintaining updated websites with details of their projects, donors, and financials.
Sharing annual reports with stakeholders, donors, and the general public.

10. Prohibitions and Penalties

NGOs must not use donations for illegal activities, personal gain, or political purposes.

Violations of legal requirements, such as failure to file returns, misuse of funds, or non-compliance with FCRA, can result in:

Cancellation of registration
Heavy Fines
Freezing of bank accounts
Legal action against the organisation and its office-bearers

Role of the Income Tax Department

1. Monitoring and Ensuring Compliance

The Income Tax Department monitors the activities and financial transactions of charitable organizations to ensure they comply with the law:

Auditing and Filing Returns: Charitable organizations must maintain proper financial records and file annual income tax returns, even if they are tax-exempt. The Income Tax Department reviews these returns to check that donations are being used for genuine charitable activities.
Audit Requirements: If an NGO’s income (before applying exemptions) exceeds a certain threshold (currently ₹2.5 lakh per year), it must have its accounts audited by a Chartered Accountant and submit this audit report to the Income Tax Department.

2. Granting and Renewing Exemptions

The Income Tax Department regularly reviews the financial activities of charitable organizations to ensure they continue to meet the requirements for tax exemptions.

Organizations must renew their 12A and 80G registrations periodically to continue enjoying tax benefits. The department checks whether the organization is still conducting charitable activities before granting renewal.

3. Ensuring Proper Use of Donations

The Income Tax Department ensures that the donations received by charitable organizations are used for legitimate purposes:

No Profit Distribution: Charitable organizations are not allowed to distribute any profit. All income, including donations, must be used for charitable activities.

Limit on Business Activities: NGOs and trusts can engage in incidental business activities, but the profits from such activities should be used entirely for charitable purposes. The Income Tax Department ensures this condition is met.

4. Preventing Misuse and Fraud

To prevent fraud and misuse of donations, the Income Tax Department has strict rules and regulations:

Regular Monitoring and Inspections: The department can inspect the accounts of charitable organizations if there are suspicions of misuse or non-compliance.
Penalties for Violations: If an NGO or trust is found misusing funds, involved in illegal activities, or not following the rules, the Income Tax Department can:
- Cancel the organization’s tax exemptions
- Impose fines and penalties
- Take legal action, including prosecution, against those responsible.

Filing Complaints Against Fraudulent Organizations

1. Income Tax Department

If the organization is misusing tax exemptions, not maintaining proper accounts, or falsely claiming to be registered under Section 80G or 12A, you can file a complaint with the Income Tax Department.

How to File: Visit the nearest Income Tax Office or use the Income Tax Department’s e-filing website E-Filing Portal to report the issue.

2. Ministry of Home Affairs (MHA) – FCRA Violations

If the organization is accepting foreign donations without proper registration under the Foreign Contribution Regulation Act (FCRA), you can file a complaint with the MHA.

How to File: Visit the FCRA website (FCRA Portal) and use the complaint section to report violations.

3. Registrar of Societies and Trusts

If the organization is registered as a society or trust, you can file a complaint with the Registrar of Societies (for societies) or the Charity Commissioner (for trusts) in your state.

How to File: Submit a written complaint with details of the fraudulent activities, evidence, and your contact information. You can find the address and contact details of the registrar’s office on your state government’s website.

4. SEBI (Securities and Exchange Board of India)

If the fraudulent organization is claiming to raise funds in the name of charity through investments or shares, you can report this to SEBI.

Use SEBI's online complaint portal called SCORES (SCORES Portal) to file a complaint.

5. Central Vigilance Commission

You can file complaints regarding corruption or fraudulent activities involving government-registered NGOs or organizations.

Visit the CVC’s website (Central Vigilance Commission) to file a complaint.

Frequently Asked Questions (FAQs)

1. How can I find out if a charity is genuine or registered?

You can check if a charity is registered by asking for their registration certificate, 12A, and 80G certificates. You can also verify their details on the Income Tax Department's website or the Ministry of Home Affairs website if they receive foreign donations.

2. How much tax deduction can I get for my donation?

Depending on the charity, you can get a deduction of either 50% or 100% of the donated amount. However, some donations are capped at 10% of your gross total income.

3. Can I donate goods or services instead of money and still get a tax deduction?

No, only monetary donations (money given through cash, cheque, or bank transfer) qualify for tax deductions. Donations in kind, like clothes, food, or services, are not eligible.

4. Can businesses also get tax benefits for charitable donations?

Yes, businesses can claim tax deductions for donations made to eligible charities under Section 80G. They can also claim deductions for certain expenses related to Corporate Social Responsibility (CSR) activities.

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Written by Shubhankar Krishnan

A Delhi University graduate and a 1st Year Law Student, Gaining experiences in Areas under General Corporate, litigation and Intellectual Property Rights.