Individuals who like to do their bit for religion through donations could now face some serious tax trouble. The revised direct taxes code (DTC), if implemented, proposes to tax these donations in the hands of the donor. The logic: The income of these institutions is going to be tax-free.
At present, if you make donations to religious institutions, you get tax relief for 50 per cent of the amount. That is, if you donate Rs 5,000 to a registered regional institution, you can claim a deduction of Rs 2,500 under Section 80G (for companies, it is Section 35AC). The rest is added to your income and taxed according to the income tax slab.
Under the new regime, the entire amount of Rs 5,000 will be added to your income and taxed, accordingly. The first draft of DTC had proposed that this deduction will be made available only if the religious institution uses the money for renovation or repair of a religious structure. The new draft said: “Donations to such (religious) trusts or institutions will not enjoy any deduction in the hands of the donor.”
The government has proposed that no deductions be allowed, even in case of institutions that are partly religious and partly charitable. However, these institutions will pay tax on their charitable activity, but no taxes on a religious one.
So, what is the way out?
Instead of donating money to religious institutions, you can donate to charitable institutions. These non-profit organisation (NPOs) include non-governmental organisations like the Red Cross and CRY. In fact, many of these religious institutions have charitable trusts as well. A donor can use this route.
“In fact, religious bodies that do not have trusts may need to create one for providing tax benefit to their donors,” said Sunil Shah, partner, Deloitte Touche Tohmatsu India .
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For income tax purposes, the revised draft divides the charitable organisations into three categories – NPOs, public religious institutions and partly religious & partly charitable institutions. And, allows tax benefits for them. The reason: The income of these charitable institutions will be taxed.
“NPOs would be subjected to tax on the surplus money, which is the excess of the basic exemption limit prescribed in the code. The surplus here means the excess of the donations and other receipts over the expenditure incurred,” said Vikas Vasal, executive director, KPMG India. Today, these institutions do not pay income tax.
The quantum of deduction remains the same. The donor will get 50 per cent deduction on the money donated. The finance minister has also kept the cap of 10 per cent of the total income to claim such donations. Any amount in excess of 10 per cent of the total income will not be eligible for deduction.
Moreover, donations made to certain institutions engaged in scientific research – like national laboratories – will get tax benefits of 125 per cent (as proposed in the first draft of DTC). At present, there is a 100 per cent tax benefit on these donations under Section 80GGA.
Donors will continue to get 100 per cent deduction if they donate money to such government schemes as the Prime Minister’s National Relief Fund, The National Foundation for Communal Harmony and National Defence Fund.