Budget 2017 proposes to slash tax benefit on cash donations to religious entities, notified funds

Budget 2017 proposes to reduce tax benefit on cash donations to Rs 2000 from the current limit of Rs 10,000 under section 80G of the Income Tax Act. This appears to be aimed at plugging a loophole that many may have been exploiting by getting fake receipts of cash donations.

According to Section 80G of the I-T Act, all donations made to specified relief funds and notified charitable institutions can be claimed as deductions from gross total income before arriving at the taxable income. Currently, the limit allowed to avail the deduction under the 80G for donations made in cash is Rs. 10,000.

However, a receipt for this cash donation is a must to claim the tax benefit. There is no limit on the deduction that can be claimed for donations made by cheque or digital payment methods provided you have a proper receipt and the institution you have donated to qualifies for the deduction you are claiming. The donations made in ‘Kind’ such as donating clothes during a disaster does not qualify for deductions.

The amount of deduction available for specified institutions as per Section 80G is either 100% or 50% of the amount donated subject to ‘with’ or ‘without’ any upper limit.

Donations made to foreign trusts and political parties do not qualify for deductions under this section. It would appear that this change is proposed in order to curb misuse of the deduction allowed for cash donations by people. It was suspected that people were claiming the deduction on the basis of fake receipts obtained without making actual donation or donating a lesser amount.

The rules allow donations made for the renovation or repair of temples, mosques, gurudwaras, churches or any other place notified by the central government to be claimed as deductions. However, the deduction that can be claimed on such donations is 50% of the amount donated or 50% of 10% of the ‘adjusted gross total income’ whichever is less. Thus in such cases an upper limit is imposed on the deduction that can be claimed on the amount donated.

Adjusted gross total income for this purpose is = Gross total income minus (i) all exempted income, (ii) long-term capital gains and (ii) all deductions under sections of the Income Tax Act except for 80G.

The government notifies separate lists of institutions/funds donations to which would be eligible for 100% or 50% deductions with or without upper limit.

First, you can claim deduction only on donations to funds/entities which are notified for this purpose by the central government.

Second, the amount of donation you can claim as deduction from income depends on how much is allowed, as per the notification, for the fund/entity you are donating to. Certain government funds such as the Prime Minister’s Relief Fund, National Defence Fund allow the donor to claim 100% deduction of the amount donated without any other limit related to gross total income.
However, other funds such as Prime Minister's Drought Relief Fund allows the donor to claim only 50% deduction of the amount donated also without any other limitation.