How to calculate the 80G limit?

Introduction

Understanding how to calculate the 80G limit is crucial for taxpayers who donate to charitable organizations and want to claim tax benefits. Section 80G of the Income Tax Act provides deductions on donations, but the extent of the benefit depends on various factors like the type of donee and the applicable percentage limits. Knowing how to calculate the 80G limit correctly helps in maximizing tax savings while ensuring compliance with tax laws. This blog will guide you through the detailed process of determining the eligible deduction under Section 80G.

What is Section 80G?

Section 80G is a provision of an Income Tax Act. An individual or company donating to charitable trust, can get donation benefits under section 80G. The purpose of this section is to support entities that are engaged in social or cultural development activities. As donations under section 80 are exempt from Income Tax, It attracts more donors to help people.

Identify the Type of Donation Under Section 80G

• 100% Deduction (No Limit): Full tax deduction for donations to funds like the National Defense Fund and Prime Minister’s National Relief Fund without any upper cap.
• 50% Deduction (No Limit): Half of the donated amount is deductible for funds like the Prime Minister’s Drought Relief Fund and National Children’s Fund, with no limit.
• 100% Deduction (Limited to 10% of Income): Donations to government or local authorities for family planning or the Indian Olympic Association qualify for full deduction, but only up to 10% of Adjusted Gross Total Income (AGTI).
• 50% Deduction (Limited to 10% of Income): Donations to government or local authorities for charitable purposes get a 50% deduction, capped at 10% of AGTI.

A Step-by-Step Guide on How to Calculate 80G Limit

Step 1: Check if the donation qualifies under Section 80G

Ensure you donate to an organization or fund approved under Section 80G of the Income Tax Act before claiming any tax deduction. Only contributions to eligible charitable trusts, government funds, or institutions qualify for tax benefits. Remember, cash donations over ₹2,000 don’t qualify for deduction; make payments via cheque, demand draft, or online transfer.

Step 2: Identify the applicable deduction category

Donations under Section 80G fall into four categories: 100% deduction (without limit), 50% deduction (without limit), 100% deduction (subject to 10% of AGTI), and 50% deduction (subject to 10% of AGTI). You need to determine under which category your donation falls. Some funds allow a full tax deduction, while others permit only half of the donated amount to be deducted. Additionally, some deductions are restricted based on your income level.

Step 3: Compute Adjusted Gross Total Income (AGTI)

To determine the limit on deductions, calculate Adjusted Gross Total Income (AGTI) using the formula:

AGTI = Gross Total Income – Exempt Incomes – Long-Term Capital Gains – Short-Term Capital Gains (Taxed at 10%) – Deductions (except 80G).

AGTI represents your taxable income after considering certain exemptions and deductions. It is essential to compute AGTI correctly, as some donations have a deduction cap based on 10% of AGTI.