Charity is a good deed, but did you know that it could help you in tax savings? Making charitable donations – be it of goods or money can bring down your taxable income and hence, decrease your overall tax liability. Wish to reduce the taxable income while doing a good deed? Read the article to know more.
Meaning of Tax Deduction
A tax deduction aids the taxpayer reduce the amount of income that becomes subject to income tax in a specified financial year.
Using Tax Deduction to Your Advantage
The income tax laws vary from country to country. However, charity is considered a deduction under income tax laws in many countries across the globe.
Every taxpayer – be it an entity or an individual – wants to save on the payment of income tax. After all, it’s their hard-earned money. However, resorting to unlawful means to reduce tax liability is not a good idea; it is unethical and could also attract a penalty. The government allows for multiple ways to reduce their taxable income; charity is one of them. A charitable donation would give you double happiness as you save on taxes, and there is another satisfaction of helping someone in need.
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Donations as a Form of Tax Deduction
If you make any donation to qualified organizations, you become eligible for claiming the same as a deduction from the taxable income. The donation may be in cash or kind. Therefore, if someone does not have any cash for donating, the same may be made in the form of other things to make tax savings.
The deduction concerning the donation cannot exceed 60% of the adjusted gross income in the United States. (Adjusted gross income is the net income on which tax is payable. This amount is arrived at after deducting the gross income earned by an individual or entity in the specific financial year).
In some cases, the limit of deduction against donation in the United States may be 20%, 30%, or 50% of the adjusted gross income.
How do Donations Work in India?
The Indian tax law allows for a tax deduction in relation to donations made under Section 80G and 80GGA of the Income Tax Act, 1961. Section 80G allows for dedicating the amount of charity made to charitable organizations and relief funds. The donations made under this section may be eligible for 100% or 50% of deduction, depending on the fund/organization to which the donation is made. The list of the organizations has been mentioned in the Income Tax Act, 1961.
Section 80GGA allows for the deduction of the amount made towards rural development and scientific research.
The deductions can be claimed on the Adjusted Gross Income, i.e., the amount arrived at after making the following adjustments:
- Income exempt from tax
- Amounts deductible under Section 80CCC to Section 80U (not including Section 80G)
- Long-term capital gains
- Income in relation to foreign companies and non-residents (as mentioned under Sections 115A, 115AB, 115AC, 115AD and 115D)
Cash donations in excess of INR 2,000 are not taken into account by the tax authorities. Therefore, it is advisable to make donations of large amounts via bank transactions, cheque, etc.; since there are proper records for backing up the transactions.
Donations to Your Advantage
Planning to make charitable donations with the thought of making savings in tax? It is better to keep certain pointers in your mind. This way, you would certainly be able to reduce your tax expense. Following are some of the pointers that will help you in tax reduction.
Plan out your donation
When you decide to make a charitable donation, it is always better to plan properly to claim the maximum benefit. This way, you will make your out of pocket cost minimal. Will you be able to make a larger saving via charitable donation? It is better to hold till the next financial year.
Donation in kind
The deduction can be claimed even if you donate goods to charity. Therefore, you can even donate your household goods to charity. The goods can be donated at their approximate value at the time of donation. It is pertinent to mention that the rules for non-cash donations are comparatively stricter. Hence, it is better to get a receipt of the donations that are not in kind. The receipt should be as per the estimated value of the goods.
Reimbursement of vehicle expenses
Vehicle expenses may be claimed in case individual volunteers for a charitable/non-profitable organization. For this, proper records of the car expenses in the relation of the organization’s work must be maintained.
Receipt for every donation
Every taxpayer should make it a habit to get a receipt of the donation made by him/her. This way, the records of the individual would be strengthened. Also, in case the records are audited, there would be valid proofs backing up the donations. For smaller donations, cancelled cheques or other records may be kept. For larger donations, maintaining records/receipts is a must as otherwise the same would be disallowed.
Here you can learn how you can get a tax exemption reciept on your donation. Charitable donations not only add to your good deeds but can also become a tax benefit for you. You do not need to donate a lot of cash to count as a charity; your old household items can also be donated. The benefit of the same will be given as a deduction from the taxable income. However, you should always ensure that proper records are maintained, especially for donations of large amounts.