Tax Deduction For Donations To Charitable Institutions

Q 1) I have made a donation of about Rs 100000 to a charitable institution. I am told that such donations are eligible for deduction u/s 80G of the Income Tax Act, 1961. How much deduction will I be eligible for?

- Param Kumthekar

You have not given full information, and hence, the exact deduction cannot be determined. As per the provisions of Section 80G of the said Act, the deduction in respect of donation made to an approved charitable institution is allowed to the extent of 50 per cent of the amount donated or the Qualifying Amount. Donations below Rs 250 are not eligible for deduction. Donations made in kind are also not eligible for deduction. The qualifying amount is 10 per cent of the Gross Total Income, as reduced by deductions permissible under other provisions of Chapter VIA of the said Act.

In case your Gross Total Income is assumed to Rs 600000 and you are availing deduction u/s 80C of the said Act to the extent of Rs 100000, the qualifying amount would be Rs 50000, being 10 per cent of the Gross Total Income as reduced by other deductions under Chapter VIA. The deduction available would be 50 per cent of the qualifying amount or actual donation, whichever is less, that is to say Rs 25000. 

Q 2) I had bought 2000 shares of XYZ Company for Rs 205 on November 1, 2013. Thereafter, on December 30, 2013, I sold all the 2000 shares of the company for Rs 200, incurring a loss of Rs 10000 on the said shares. In the meantime, I received Rs 40000 (viz. Rs 20 per share) as dividend. But I had heard that if the company pays dividend, I will not be allowed the benefit of setting off or carrying forward the loss. Could you explain why this is so? To my knowledge, dividend is exempt from tax and my loss and dividend are not directly connected.

- Parineeta S Mallapurkar

Section 94(7) of the Income Tax Act, 1961 disallows set-off benefit of any short-term capital loss if the shares were acquired within three months before the record date or sold within three months after the record date. In simple words, short-term capital loss (if any) arising on the sale of such shares shall be ignored to the extent of dividend received or receivable thereon. This is called ‘dividend stripping’. 

Dividend stripping will be applicable in the following cases:

1. Buying or acquiring any securities or units within a period of three months prior to the record date.
2. Selling or transferring such securities within a period of three months after such date, or such units within a period of nine months after such date.
3. The dividend or income on such securities or units received or receivable by such person during the intervening period is exempt from tax.