The Government prods us tax payers to give – not just to it but also to other good causes. It does this by allowing tax deduction on donations. In popular parlance, these are known as Section 80G deductions which can help reduce our tax outgo. But there are rules and restrictions.

Be kind but not in kind

Deduction is allowed only if you donate money. There is no deduction if you give in kind. So, if you want a tax break, donate money, and not clothes, food items, utensils or such items. There is another catch, introduced in last year's Budget. Donations in cash above Rs 10,000 are not eligible for deduction. So, if you intend to give more than Rs 10,000, do so in modes other than cash such as cheques, demand drafts and online bank transfers.

Pick and choose

You will get a tax deduction only if you donate to institutions and funds approved by the Government. This list is long and includes many government and non-government organisations. So, before giving, check with the entity whether the donation qualifies for deduction under Section 80G of the Income Tax Act, and ask to see its registration certificate. In most cases, eligible entities volunteer information about the tax deduction you can get as a donor. Donations to political parties and foreign entities do not qualify for deduction. Details of many eligible institutions and funds (not a comprehensive list) can be found at http://law.incometaxindia.gov.in/DIT/Income-tax-acts.aspx. Search under Section 80G in Chapter VIA.

Limits to deduction

You can give as much as you want to, but there may be limits on the amount of tax deduction you can get. There are two kinds of restrictions – one based on the qualifying amount (whether 100 per cent or 50 per cent of the donation is eligible for deduction) and the other based on taxable income (whether the qualifying amount is subject to a limit of 10 per cent of gross total income).
So, eligible donations fall under four tax-deduction categories – 100 per cent qualified without limit, 100 per cent qualified with limit, 50 per cent qualified without limit, and 50 per cent qualified with limit. Donations to many Government-run entities qualify for 100 per cent tax deduction while in the case of non-Government entities, only 50 per cent of the donation usually qualifies for deduction. These amounts may be further subject to the limit of 10 per cent of your gross total income. This is your taxable income after taking into account other deductions (including the Rs 1 lakh annual tax break allowed on investments in instruments such as EPF and PPF).
Let's consider an example. Suppose your income for the year from various sources is Rs 7 lakh and you have invested Rs 1 lakh in provident funds. This makes your gross total income Rs 6 lakh. Now, say you give Rs 75,000 to an eligible entity, donations to which are qualified for tax deduction to the full extent (100 per cent). But if the donation is subject to the limit of 10 per cent of gross total income, the deduction you can claim will be restricted to Rs 60,000 (10 per cent of Rs 6 lakh).

Claiming deduction

You will have to claim deduction on the donation you make at the time of filing your tax return. Employers usually do not take into account declarations from employees about Section 80G donations while computing and deducting their monthly taxes. When you donate, ask for a stamped receipt which mentions the registration number of the entity and the Section 80G tax benefit on your donation. These days, submitting the receipt along with the tax return is not mandatory. But it may come handy at a later date if the tax-officer asks for proof of donation. So, keep the receipt carefully.