Tax Tips – Donation deduction Sec 35AC

For individuals with salary income, 100% deduction for eligible donations can be claimed under section (u/s) 80GGA. However if you are a business or self employed or earning income for professional services (legal, medical, engineering, accounting, technical consultancy, interior decoration, advertising etc) or technical services (managerial , technical or consultancy services) then you cannot claim deduction for donation u/s 80GGA. For individuals with business or profession income deduction for eligible donations has to be claimed u/s 35 AC.

Section 35 AC (1) deduction for eligible donations

“ Where an assessee incurs any expenditure by way of payment of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme, the assessee shall, subject to the provisions of this section, be allowed a deduction of the amount of such expenditure incurred during the previous year. ”

National Committee

The Central Government has constituted a National Committee to identify projects and schemes to be notified u/s 35AC. This committee normally consists of eminent persons. All NGOs are entitled to apply to the National Committee to get its projects or schemes approved.

Receipt for Donation

All approved NGOs are required to issue a certificate to the donor for all contributions & receipts u/s 35AC. The certificate is to be issued in Form 58A. This certificate will enable the donor to claim exemption from its taxable income.

http://law.incometaxindia.gov.in/DITTaxmann/IncomeTaxRules/pdf/itr62form58a.pdf

Business / Profession income

Section 35AC is available to assessees who have income from the head ‘business’ or ‘profession’. for assessees who do not have income from business or profession, section 80GGA provides for deduction on donations made to eligible projects u/s 35AC.

Cash/ Kind/ Cheque

  • The section does not mention any restrictions on donations in cash. However, the assessee will need to satisfy the requirement u/s 40 A (3) which states as follows:

 

“ Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure. ” 

 

  • Donations in kind are not eligible for deduction.

Carry Forward

Unlike section 80GGA, deduction u/s 35AC can be carried forward in the form of losses to next year

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NGO as per IT act, Sec 25 Company – Registration

For an NGO looking to be registered as a section 25 company (under The Companies Act, 1956) or looking for registration for claiming tax exemption (under The Income Tax Act, 1961) needs to know whether its activities come within the definition of eligible activities under the respective acts.

Charitable Purpose under Income Tax Act:

The definition of what constitute Charitable purpose is important for claiming deductions under section (u/s) 12 A and 80 G of The Income Tax Act.

Section 2 (15) of the Income tax act defines Charitable purpose as below:

“charitable purpose” includes

  • relief of the poor,
  • education,
  • medical relief,
  • [preservation of environment (including watersheds, forests and wildlife)
  • and preservation of monuments or places or objects of artistic or historic interest,]
  • and the advancement of any other object of general public utility:
    • Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves
      • the carrying on of any activity in the nature of trade, commerce or business,
      • or any activity of rendering any service in relation to any trade, commerce or business,
      • for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity:]
    • [Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is [twenty-five lakh rupees] or less in the previous year;]

This definition will guide registration for exemption u/s 12 A or section 80 G of the Income Tax Act.

Further Section 80 G provides the below two explanations:

Explanation 3.—In this section, “charitable purpose” does not include any purpose the whole or substantially the whole of which is of a religious nature.

[Explanation 4.—For the purposes of this section, an association or institution having as its object the control, supervision, regulation or encouragement in India of such games or sports as the Central Government may, by notification in the Official Gazette, specify in this behalf, shall be deemed to be an institution established in India for a charitable purpose.]

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The Indian Companies Act, 1956

Non Profit Organizations can be registered as a Section 25 company. This is one of the popular methods of registration for a NGO.

Section 25 lays down the following three criteria for eligibility:

 

(a) company being formed is for promoting commerce, art, science, religion, charity or any other useful object, and 

(b) intends to apply its profits,  if any, or other income in  promoting its objects, and to prohibit the payment of any dividend to its members, 

(c) the Central Government may, by licence, direct that the  association may be registered as a company with limited  liability, without the addition to its name of the word “Limited” or the words “Private Limited”

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