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Donations can reduce your income-tax outgo

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June, 2014
Financial Chronicle
Ritwik Mukherjee

Increased awareness of charity has made Indians open their purses when the time comes to take some tax-saving measures

A couple of months ago, a study done by GiveIndia, a non-profit, suggested that Indians are big donors, but only during certain seasons. As per the study, over the last couple of years, there has been a steady rise in donors and donations during the tax-saving months, January to March. This suggests Indians tend to open their purses to charity when the time comes to take some tax-saving measures. The reason can be increased awareness of donations being a tax-deductible benefit and a higher degree of communication by charities around this time.

Whatever the merits of the survey, many people give donations and should regard them as financial outgo. This makes them an integral part of our personal finance decisions. So the old-fashioned view that giving donations is a philanthropic activity is giving way to seeing donations as financial strategy – for discerning sections at least. Yes, donations are an item on balance sheets, to be accounted for at the end of the financial year. Professional investors will always want these documented and audited.

One useful piece of advice one should always keep in the mind is that one's core asset allocation should not be revised to accommodate donations (despite tax breaks, if any) as this may create problems elsewhere. Also, it is prudent to impose limits and sub-limits on one's philanthropy.

Income-tax law suggests that an amount donated to trusts, charitable institutions and approved educational institutions, qualifies for deduction under Section 80G of the Income-Tax Act. The exemption in most exemption-eligible entities is 50 per cent of the donations made. This sum is deducted from your taxable total income, thus reducing your tax liability by that amount.

The other pertinent questions one is faced with while taking a call on giving donations include: how should one decide the exact amount of sum one wants to give as donations every year? While one should always give some leeway to emotions, what are the mathematical and technical aspects to consider in such cases? How to allocate proportions of one’s savings to donations? Should one diversify one’s donation amount across more than one NGO, so on and so forth.

If financial advisors’ counsel is anything to go by, investors should always go ahead with their donations provided the standard checks and balances are maintained. Also, since each investor has special, unique needs and aspirations (when it comes to philanthropy), each individual is subject to a few unique conditions as well.

An important caveat is that emotions often play a role when it comes to determining the timing, nature and amount of charity. But it will not be prudent for investors to give in to emotions in such a way that it starts affecting your savings which are required for your financial – and retirement – planning.

One is also often faced with the dilemma: should tax considerations dominate one’s decision on whom to donate? While giving to tax-eligible NGOs will mean saving some tax on your income through your donations, you may not be comfortable with the limited choices available. There are a lot of NGOs who are not tax-eligible but who are doing better work than the tax-eligible ones. But if you come across a non-profit which offers tax benefit and fits perfectly with your objectives, then you should donate at least half your allocated amount to that charity.

Nilanjan Dey, a financial planner and director, Wishlist Capital Advisors, says, “As financial advisors, we try not to interfere with choices of recipients. In fact, it is mostly left to the wishes of the donor. Investors, we believe, should be free to choose his charitable causes in order to accomplish his philanthropic wishes.”

“Donation should always follow the famed Mother Teressa principle – ‘give till it hurts’. In short, this means that philanthropy should, rationally speaking, not hurt your core asset allocation tactic,” said Dey.

Quite like Dey, Amitava Banik, tax planner and advisor, said that donations should not in any way upset one’s asset allocation, except for exceptional or special cases.

Perhaps a good idea is to set a benchmark, which will automatically set a limit on the donation. For instance, one can set a benchmark: “I will donate only 10 per cent of my net annual surplus to charity” is probably a smart thing to do. Other sub-limits are also quite necessary.

In fact, the modern investor may wish to impose sub-limits like:>br>
a) Monthly / quarterly sub-limits — where periodic benchmarks are set. Example: “I will not give more 20 per cent of my overall limit in a single month.”

b) Charitable organisation sub-limits — where multiple recipients are involved. Example: “I will not give more than 25 per cent of my total donation to any single NGO in any single financial year.”

Tax breaks, if any, may cause some investors to consider donations more actively than they want. This is a reality that determines a small part of their personal financial activity. “Most investors we deal with are open to the idea, albeit they raise many issues regarding the eligibility/efficiency of the recipient. We advise them to select the most trusted names in the world of philanthropy,” says Dey.