Transformation of Tax Deduction Mechanism in respect of donations to certain funds : Clause 133 of the Income Tax Bill, 2025 Vs. Section 80G of the Income-tax Act, 1961

Clause 133 Deduction in respect of donations to certain funds, charitable institutions, etc.

Income Tax Bill, 2025

Introduction

Clause 133 of the Income Tax Bill, 2025, proposes to consolidate and modernize the framework for deductions in respect of donations to certain funds, charitable institutions, and other specified entities. This clause is intended to replace, update, or otherwise correspond to the existing Section 80G of the Income-tax Act, 1961, which has long served as the statutory provision governing tax deductions for charitable donations in India. The significance of these provisions lies in their dual role: incentivizing philanthropy and ensuring regulatory oversight over the entities eligible for such fiscal benefits. The present analysis provides a detailed, provision-wise commentary on Clause 133, followed by a systematic comparison with the existing Section 80G. The aim is to highlight legislative intent, key similarities and differences, interpretative issues, and practical implications for taxpayers, charitable organizations, and the administration of direct taxes in India.

Objective and Purpose

The legislative intent behind both Clause 133 and Section 80G is to encourage voluntary contributions towards causes of public welfare, national interest, and social development by providing tax incentives to donors. The provisions are also designed to ensure that only bona fide and regulated entities benefit from this policy, thereby preventing abuse and fostering transparency in the charitable sector. Historically, Section 80G has evolved through numerous amendments to address issues of misuse, to clarify eligible recipients, and to align with changing social priorities (such as disaster relief, education, and health). Clause 133 seeks to further streamline these objectives by updating the list of eligible funds, clarifying procedural aspects, and reinforcing compliance mechanisms, such as digital reporting and risk-based verification.

Detailed Analysis of Clause 133

Clause 133 is structured into several sub-clauses, each addressing a specific aspect of the deduction regime. The key features are analyzed below:

1. Eligible Donations and Quantum of Deduction (Sub-section 1)

1. 100% Deduction [Clause 133(1)(a)]: The clause enumerates a detailed list of funds and institutions to which donations are eligible for a full (100%) deduction from the total income of the assessee. These include:
   • National Defence Fund, Prime Minister's National Relief Fund, PM CARES Fund, and other central or state-level disaster relief funds.
   • Funds for specific causes (e.g., National Children's Fund, National Foundation for Communal Harmony, National Blood Transfusion Council).
   • Universities or educational institutions of national eminence, subject to approval.
   • Specific state government funds (e.g., Gujarat Earthquake Relief), and district-level literacy societies.
   • Medical relief funds, welfare funds for armed forces personnel, and funds for illness assistance.
   • National Sports Development Fund, National Cultural Fund, Fund for Technology Development, Swachh Bharat Kosh, Clean Ganga Fund, and National Fund for Control of Drug Abuse.
   • Entities promoting family planning, and sports associations recognized by the Central Government (for companies).
   The inclusion of explicit exclusions for sums spent under Corporate Social Responsibility (CSR) u/s 135(5) of the Companies Act, 2013, for certain funds (e.g., Swachh Bharat Kosh, Clean Ganga Fund) is notable and aligns with recent policy clarifications.
2. 50% Deduction [Clause 133(1)(b)]: Donations to other specified funds and institutions are eligible for a 50% deduction, including:
   • Prime Minister's Drought Relief Fund, other approved charitable institutions (subject to conditions), government or local authority for charitable purposes (excluding family planning), authorities for housing or urban development, and corporations for minority community welfare.
   • Donations for renovation or repair of notified places of worship of historic or artistic importance.
   The clause defines "minority community" as notified by the Central Government, ensuring clarity.

2. Aggregate Limit (Sub-section 2)

Where the aggregate of certain donations (e.g., those for family planning, sports infrastructure, and those under sub-section 1(b)) exceeds 10% of the adjusted gross total income, the excess over 10% is ignored for deduction purposes. This cap is designed to prevent disproportionate tax benefits and to ensure the deduction remains within reasonable limits relative to the taxpayer's income.

3. Exclusion from Double Deduction (Sub-section 3)

Any sum allowed as a deduction under Clause 133 cannot be claimed under any other provision of the Act for the same or any other tax year. This anti-duplication measure is critical for fiscal discipline.

4. Nature and Mode of Donation (Sub-sections 4 and 5)

• Deductions are allowed only for donations made as a sum of money (not in kind).
• Donations exceeding Rs. 2,000 must be made by a mode other than cash to qualify for deduction, reinforcing the move towards digital and traceable transactions.

5. Compliance and Reporting (Sub-section 6)

For donations to institutions or funds under sub-section (1)(b)(ii), the deduction is allowed only if:

• The institution or fund furnishes information regarding the donation to the prescribed authority.
• The claim is subject to verification as per the risk management strategy formulated by the Board.

This provision strengthens compliance and aligns with the broader digitalization and risk-based monitoring of charitable donations.

6. Definitions and Interpretative Clarifications (Sub-section 7)

Key terms such as "adjusted gross total income," "charitable purpose," and the nature of the National and State Blood Transfusion Councils are defined. Notably, "charitable purpose" is expressly stated to exclude purposes wholly or substantially of a religious nature, maintaining the secular character of the deduction regime.

Comparative Analysis with Section 80G

A detailed comparison reveals both continuity and innovation in the new Clause 133 vis-`a-vis the existing Section 80G.

1. Scope of Eligible Recipients

Both provisions enumerate a similar list of eligible funds and institutions, with only minor variations in nomenclature and sequencing. However, Section 80G contains a longer, more fragmented list, reflecting its piecemeal evolution. Clause 133 consolidates and streamlines these categories, possibly omitting obsolete or merged funds (e.g., certain state-specific relief funds that are no longer operational). Section 80G also includes a provision for donations to "any other fund or institution to which this section applies," subject to approval and compliance with detailed conditions (sub-section 5). Clause 133 maintains a similar approach but refers to Schedule VII (Table: Sl. No. 1) and approval u/s 354, possibly signifying a shift towards a more codified and centralized approval process.

2. Quantum of Deduction

Both provisions distinguish between 100% and 50% deductions, depending on the nature of the recipient fund or institution. The underlying policy is consistent: donations to funds of national importance or for specific critical purposes (e.g., defence, disaster relief) are incentivized more than general charitable donations. Section 80G, however, contains a more complex calculation mechanism, especially where the aggregate includes sums eligible for both 100% and 50% deduction (sub-section 1(i)). Clause 133 simplifies this by more directly specifying the eligible categories under each quantum.

3. Aggregate Cap

Both provisions impose a 10% cap (of gross total income or adjusted gross total income) on certain categories of donations. Section 80G details the sub-clauses to which the cap applies, whereas Clause 133 refers to the relevant sub-sections more succinctly. The methodology for calculating "adjusted gross total income" is explicitly defined in Clause 133, reducing ambiguity.

4. Conditions for Eligible Institutions

Section 80G lays out extensive conditions for approval of institutions and funds:

• Charitable purpose, non-religious in nature.
• Registration under relevant laws (trust, society, etc.).
• Non-profit distribution, regular accounts, and restrictions on benefit to any religious community or caste.
• Approval by the Principal Commissioner or Commissioner, subject to periodic renewal and compliance with reporting requirements.
• Detailed procedural rules for application, renewal, and cancellation of approval.

Clause 133, while referencing approval and compliance, appears to delegate much of the procedural detail to subordinate legislation (e.g., Schedule VII, section 354, prescribed authority), potentially allowing for more flexible and up-to-date regulatory mechanisms.

5. Exclusion of Religious Purpose

Both provisions unequivocally state that "charitable purpose" does not include purposes wholly or substantially of a religious nature. Section 80G, however, contains an explicit deeming provision (sub-section 5B) allowing up to 5% expenditure of a religious nature without disqualification. Clause 133 does not contain a comparable express carve-out, suggesting a stricter approach or an intent to clarify this via subordinate rules.

6. Mode of Donation and Anti-Abuse Provisions

Both provisions restrict deductions to monetary donations (not in kind) and require non-cash payment for amounts exceeding Rs. 2,000. Section 80G previously had a higher threshold (Rs. 10,000), which has since been aligned with the Rs. 2,000 limit, now mirrored in Clause 133. The anti-duplication rule is present in both (Section 80G(5A); Clause 133(3)), ensuring that a donation cannot be claimed under multiple provisions.

7. Reporting, Compliance, and Digitalization

Section 80G has, post-2020, mandated digital reporting by recipient institutions (sub-section 5(viii), (ix)), requiring statements to be furnished to the tax authorities and certificates to be issued to donors. Clause 133(6) similarly conditions deduction on information being furnished by the recipient institution and allows for risk-based verification. Both provisions thus reflect the policy shift towards digital administration and data-driven compliance.

8. Transitional and Miscellaneous Provisions

Section 80G contains detailed transitional provisions, explanations, and clarifications regarding the status of institutions, approval processes, and the treatment of pending applications. Clause 133, as a new provision, is more streamlined but may rely on future notifications or rules for transitional arrangements.

Practical Implications

For Taxpayers

• Taxpayers must ensure donations are made to eligible entities, via non-cash modes for amounts above Rs. 2,000, and secure appropriate documentation (receipts, certificates).
• Donations to entities not listed or not approved under the new regime will not qualify, necessitating due diligence.
• The 10% cap on eligible donations for certain categories requires careful tax planning to maximize benefit.

For Charitable Institutions

• Institutions must secure and maintain approval as per the new procedures, furnish timely digital statements to authorities, and issue certificates to donors.
• Non-compliance may result in denial of deduction to donors, potentially affecting fundraising.
• Entities with religious objectives must be cautious, as the exclusion for religious purposes is strictly enforced.

For Tax Authorities

• The digitalization of reporting and risk-based verification enhances oversight but also increases administrative responsibility.
• Clear guidelines and robust IT systems will be necessary to process and verify the large volume of data generated under these provisions.

Ambiguities and Issues in Interpretation

Transitional Issues 

Transition from Section 80G to Clause 133 may give rise to questions regarding the status of approvals granted under the old regime, treatment of donations made during the transition period, and continuity of eligibility for ongoing or recurring donations.

Definition of Charitable Purpose

While both provisions exclude religious purposes, the practical interpretation of "substantially religious" may still give rise to disputes, especially for institutions with mixed objectives.

Compliance Burden

The increasing compliance requirements for donee institutions (approval, reporting, certificate issuance) may pose challenges, especially for smaller entities. Any lapses could adversely affect donors, potentially leading to litigation.

Ceiling and Classification Issues

The 10% ceiling and classification of donations into 100% and 50% categories can be complex, especially when donors make multiple donations to different categories. Errors in classification or calculation may lead to disallowance or disputes.

Areas for Reform or Judicial Clarification

• Clear transitional guidelines should be issued to address approvals, ongoing donations, and treatment of donations made around the time of legislative change.
• Further clarification may be warranted on the scope of "charitable purpose" and the permissible extent of incidental religious activity.
• Consideration could be given to simplifying the compliance burden for small institutions, perhaps through thresholds or digital facilitation.
• Greater public awareness and guidance for both donors and donee institutions would help in smoother implementation and reduced disputes.

Conclusion

Clause 133 of the Income Tax Bill, 2025, represents a comprehensive and modernized approach to the deduction regime for charitable donations in India. While it retains the core policy and structure of Section 80G, it seeks to simplify, clarify, and digitize the regime in line with contemporary administrative and compliance requirements. The comparative analysis reveals substantial continuity but also key innovations, particularly in the areas of digital reporting, approval processes, and the explicit exclusion of CSR-related donations. Stakeholders must closely monitor the evolution of subordinate legislation and administrative guidance under the new regime to ensure seamless compliance and to maximize the intended benefits of charitable giving within the framework of Indian direct tax law.

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Full Text:

Clause 133 Deduction in respect of donations to certain funds, charitable institutions, etc.

 

Dated: 16-4-2025