 "How donations to crowdfunding campaigns can help reduce your tax burden")
Crowdfunding has become a tool for individuals and organisations to raise funds for various causes: From medical emergencies to education. Contributing to crowdfunding campaigns offers tax benefits, making it a win-win for both donors and recipients.
Understanding crowdfunding
Crowdfunding involves collecting small contributions from a large number of people, typically through online platforms like Ketto, Milaap, and GoFundMe. These platforms have gained popularity as they provide a straightforward way for individuals to raise funds for personal or charitable causes.
“Donating through crowdfunding can significantly reduce your tax burden. Contributions to eligible campaigns can be claimed as deductions under Section 80G of the Income Tax Act. This not only supports important causes but also provides financial relief to donors,” said Varun Sheth, co-founder of Ketto.
“Ensuring that you obtain the necessary tax exemption receipts from these platforms makes the process straightforward and beneficial for both parties. By engaging in crowdfunding, individuals can make a meaningful impact on society while also leveraging the benefits of tax deductions. It’s a win-win situation where generosity and financial prudence go hand in hand,” he said.
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Tax on crowdfunding in India
Contributions received by individuals through crowdfunding platforms are subject to Income Tax. However, nongovernmental organisations and non-profits raising funds through crowdfunding are entirely exempt from tax. Donations made to non-profit or charitable institutions qualify for tax deductions under Section 80G of the Income Tax Act. The Finance Act of 2017 stipulates that cash donations exceeding Rs 2,000 are not eligible for tax deductions. Legal donation-based crowdfunding is widely accepted for both personal and social causes by individuals and NGOs.
“The agencies raise the funds on behalf of the charitable trust and after reducing the cost of fund raise transfer the funds to the charitable trust who in turn will provide medical/ educational assistance or cause which is charitable in nature,” said Sandeep Shah, partner at CIGNAS.
“In the hands of the beneficiary, such assistance is tax free as specific exemption has been granted under Section 56 of the Income Tax Act. However, in order to get exemption, such trust should hold a valid section 12AA of Income Tax Act registration certificate. This is important as crowd funding agencies do raise funds for Not for Profit institutions but it is not necessary that such NPO or NGO holds valid 12AA certificate,” he said.
Tax-efficient crowdfunding
When setting up a crowdfunding campaign, aim to partner with a non-profit that has a valid 80G certification. This ensures that both donors can claim tax deductions and that the funds are not subject to income tax upon receipt.
Both fundraisers and donors should maintain detailed records of all transactions. This includes receipts for donations and documentation of how funds are used, which is essential for tax reporting purposes.
Given the complexities of tax laws surrounding crowdfunding, it is advisable for both donors and recipients to consult with tax professionals. They can provide tailored advice based on individual circumstances and help navigate the intricacies of tax deductions and liabilities.
Timing donations can also impact tax liabilities. Donors should consider making contributions in a financial year that aligns with their income levels to maximise tax benefits.