10.1 Tax Deductions for Donors under Section 80G of the Income-tax Act, 1961

The Catalytic Role of Section 80G in Philanthropic Capital

Section 80G of the Income-tax Act, 1961 is the primary fiscal incentive encouraging domestic individuals, Hindu Undivided Families (HUFs), partnerships, and corporate entities to make philanthropic donations to approved charitable institutions. For an NPO seeking registration and listing on the Social Stock Exchange, possessing an active, verified Section 80G registration is a mandatory prerequisite under SEBI ICDR Regulation 292F.

Individual / Corporate Donor ---> Donates to 80G Registered NPO ---> Receives Form 10BE Certificate
                                                                            |
                                 Deducts 50% or 100% of donation from Gross Total Income (Reduces Tax!)

Typology of Deductions under Section 80G

Deductions under Section 80G are categorized into four distinct fiscal quadrants based on deduction percentages and qualifying limits:

+---------------------------------------------------------------------------------------------------+
|                                  SECTION 80G DEDUCTION CLASSIFICATION                             |
+-----------------------------------+---------------------------------------------------------------+
| Category 1: 100% Deduction        | - National Defence Fund, Prime Minister's Relief Fund,        |
| WITHOUT Qualifying Limit          |   Clean Ganga Fund, National Children's Fund                  |
+-----------------------------------+---------------------------------------------------------------+
| Category 2: 50% Deduction         | - Prime Minister's Drought Relief Fund, Jawaharlal Nehru      |
| WITHOUT Qualifying Limit          |   Memorial Fund, Indira Gandhi Memorial Trust                 |
+-----------------------------------+---------------------------------------------------------------+
| Category 3: 100% Deduction        | - Donations to Government or approved local authority for     |
| WITH Qualifying Limit             |   promoting family planning                                   |
+-----------------------------------+---------------------------------------------------------------+
| Category 4: 50% Deduction         | - Standard charitable trusts, societies, Section 8 companies, |
| WITH Qualifying Limit (Most NPOs) |   and NPOs registered on the Social Stock Exchange            |
+-----------------------------------+---------------------------------------------------------------+

The Qualifying Limit Mechanism

For donations falling under Categories 3 and 4 (including standard social enterprises):

• The Qualifying Limit is capped at 10% of the donor's Adjusted Gross Total Income (AGTI).
• Adjusted Gross Total Income equals Gross Total Income minus long-term capital gains, short-term capital gains under Section 111A, and all deductions under Chapter VI-A (except Section 80G).
• Any donation amount exceeding 10% of AGTI is ineligible for tax deduction.

Mandatory Compliance: Statement of Donations (Form 10BD) and Form 10BE

To prevent fraudulent bogus donation receipts:

1. Filing of Form 10BD: Every charitable institution must electronically submit an annual statement of all donations received to the Income Tax Department in Form 10BD on or before May 31 immediately following the financial year.
2. Issuance of Certificate (Form 10BE): The NPO must generate and issue a formal Certificate of Donation in Form 10BE to the donor containing unique transaction identification numbers.
3. Pre-Filled ITRs: The Income Tax Department cross-checks Form 10BD data; donors can only claim Section 80G deductions if the donation appears in their pre-filled Income Tax Returns (AIS/TIS).

10.2 Tax Exemption Regime for Social Enterprises: Section 12A / 12AB and Section 10(23C)

The Charitable Purpose Doctrine under Section 2(15)

In Indian tax jurisprudence, income earned by a social enterprise is completely exempt from income tax only if the entity is established for a recognized Charitable Purpose defined under Section 2(15) of the Income-tax Act, 1961:

• Relief of the poor
• Education and vocational skilling
• Medical relief
• Preservation of environment (including watersheds, forests, wildlife)
• Preservation of monuments or places of historical importance
• General public utility (GPU) activities

The Overhauled Registration Regime: Section 12AB

Historically, charitable trusts obtained permanent, lifetime tax exemption certificates under legacy Section 12A or Section 12AA. The Finance Act, 2020 enacted a sweeping systemic reform, replacing Section 12AA with Section 12AB:

+---------------------------------------------------------------------------------------------------+
|                         SECTION 12AB RENEWABLE REGISTRATION ARCHITECTURE                          |
+-------------------+-------------------------------------------------------------------------------+
| Provisional       | Granted to newly formed non-profit entities without operational track records;|
| Registration      | Valid for **three (3) years**; allows initial fundraising                     |
+-------------------+-------------------------------------------------------------------------------+
| Regular / Final   | Granted after scrutiny of genuine charitable activities and accounts;         |
| Registration      | Valid for **five (5) years**; must be renewed at least 6 months prior to expiry|
+-------------------+-------------------------------------------------------------------------------+
| Mandatory For SSE | Under SEBI regulations, an NPO must hold a valid, unexpired Section 12AB      |
| Registration      | registration certificate to qualify for onboarding on the Social Stock Exchange|
+-------------------+-------------------------------------------------------------------------------+

Statutory Conditions for Enjoying Tax Exemption under Sections 11 and 12

To ensure 100% tax exemption on voluntary contributions and programmatic receipts:

Total Receipts in Financial Year
       |
       +---> 15% Unconditional Statutory Accumulation Allowed (Carried forward indefinitely)
       |
       +---> 85% Must be Applied for Charitable Purposes during the financial year!
             |
             +--- If 85% cannot be spent due to operational delays:
                  Form 9A (Deemed Application) or Form 10 (Accumulation for up to 5 years) must be filed!

1. The 85% Application Rule: The NPO must apply at least 85% of its gross income towards its specified charitable objectives within the financial year.
2. Statutory Accumulation (15%): Up to 15% of annual income can be retained and accumulated without attracting tax liabilities.
3. Accumulation under Section 11(2): If an NPO cannot spend 85% within the year, it can formally accumulate surplus funds for up to five (5) years by filing Form 10 with the Assessing Officer, specifying the exact capital expenditure purpose (e.g., constructing a hospital).
4. Permissible Investment Avenues (Section 11(5)): Accumulated funds must be strictly parked in approved safe avenues: Government securities, postal savings accounts, scheduled commercial bank deposits, or units of UTI. Investing in equity shares or speculative instruments forfeits tax exemption!

10.3 Commercial Receipts under Proviso to Section 2(15), Section 11(4A), and Foreign Contribution (FCRA) Compliance

Commercial Receipts and the General Public Utility (GPU) Proviso

While education, healthcare, and environmental conservation enjoy wide tax flexibility, entities categorized under the residual head Advancement of Any Other Object of General Public Utility (GPU) are subject to strict statutory restrictions under the proviso to Section 2(15):

+---------------------------------------------------------------------------------------------------+
|                        PROVISO TO SECTION 2(15): GPU COMMERCIAL RESTRICTIONS                       |
+-------------------+-------------------------------------------------------------------------------+
| General Rule      | An entity pursuing GPU ceases to be charitable if it carries on any activity   |
|                   | in the nature of trade, commerce, or business for a cess, fee, or consideration|
+-------------------+-------------------------------------------------------------------------------+
| Statutory Carve-  | Permitted to earn commercial receipts ONLY IF:                                |
| Out (Safe Harbor) | 1. Commercial activity is conducted in actual course of carrying out GPU; AND  |
|                   | 2. Aggregate commercial receipts do NOT EXCEED **20% of total gross receipts**|
|                   |    of the entity in that financial year!                                      |
+-------------------+-------------------------------------------------------------------------------+
| Consequence of    | If commercial receipts exceed 20%, entire tax exemption under Section 11 is   |
| Breaching 20% Cap | forfeit for that year; entire net surplus taxed at Maximum Marginal Rate (MMR)!|
+-------------------+-------------------------------------------------------------------------------+

Business Income Incidental to Objectives: Section 11(4A)

Under Section 11(4A), an NPO can operate an incidental business undertaking (e.g., selling handicrafts made by disabled artisans) without forfeiting tax exemption, provided:

• The business activity is incidental to the attainment of the charitable objectives.
• The NPO maintains separate, distinct books of accounts for the business undertaking.

Foreign Contribution (Regulation) Act, 2010 (FCRA) Compliance

Social enterprises seeking foreign philanthropic contributions or offshore outcome-funding grants must comply with the strict mandates of FCRA 2010 (amended in 2020):

+---------------------------------------------------------------------------------------------------+
|                                 CORE FCRA 2020 COMPLIANCE MANDATES                                |
+-------------------+-------------------------------------------------------------------------------+
| Designated Bank   | All foreign contributions must be received EXCLUSIVELY in the designated      |
| Account Mandate   | "FCRA Account" maintained at the **State Bank of India (SBI), New Delhi Main  |
|                   | Branch (NDMB)**; funds can subsequently be transferred to operational accounts|
+-------------------+-------------------------------------------------------------------------------+
| Cap on Admin      | Administrative expenses funded from foreign contributions are strictly capped  |
| Expenses          | at **20% of total foreign funds** received (reduced from legacy 50% limit)    |
+-------------------+-------------------------------------------------------------------------------+
| Prohibition on    | An FCRA-registered NPO is strictly PROHIBITED from sub-granting or            |
| Sub-Granting      | transferring foreign contributions to any other domestic NGO/NPO              |
+-------------------+-------------------------------------------------------------------------------+
| Aadhaar of Board  | Mandatory submission of Aadhaar numbers of all trustees and directors         |
+-------------------+-------------------------------------------------------------------------------+

Non-compliance with FCRA leads to immediate suspension/cancellation of registration, criminal prosecution, and automatic disqualification from the Social Stock Exchange.