Tax Rebate on Donations under Section 61 of the Income Tax Ordinance, 2001

Introduction

Donations are more than just acts of generosity; they play a pivotal role in fostering societal welfare. To encourage philanthropy, the Income Tax Ordinance, 2001, under Section 61, offers rebates on donations. This provision allows individuals and businesses to claim tax credits for contributions made to qualifying organizations. Let’s dive into the details of how this works.

What is a Tax Rebate on Donations?

A tax rebate or credit on donations is a reduction in the taxpayer’s liability, granted for contributing to approved organizations, trusts, or institutions. This rebate applies to both cash and in-kind contributions (e.g., property).

Eligibility for Tax Rebate on Donations

Under Section 61, donations made to the following entities are eligible for a rebate:

1. Educational Boards or Universities: Established under any law in Pakistan.
2. Educational Institutions, Hospitals, or Relief Funds: Run by federal, provincial, or local governments.
3. Non-Profit Organizations (NPOs): Trusts or welfare organizations approved by tax authorities for charitable, religious, educational, or sports promotion purposes.
4. Entities in the 13th Schedule: Specific organizations and funds mentioned in the Income Tax Ordinance.

Key Definitions

• Charitable Purpose: Activities aimed at the relief of poverty, education, medical relief, and public utility services as outlined in Section 2(11A).
• Non-Profit Organization: Entities established for public benefit, registered under the Trust Act or Companies Act 2017, with no private benefit to any individual.

Limits on Tax Rebate

The tax credit is calculated at the average rate of tax on the lower of:

1. The actual donation amount or the fair market value (FMV) of the donated property.
2. 30% of taxable income (20% for companies).

For Donations to Associates:

Tax credit is limited to:

• The actual donation amount or FMV of property.
• 15% of taxable income (10% for companies).

Calculating the Average Rate of Tax

The average tax rate is computed as:

Average Tax Rate=A/B​

Where:

• $A$ = Tax liability before rebate.
• $B$ = Taxable income.

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Why is Section 61 Important?

1. Encourages charitable giving.
2. Provides financial incentives for taxpayers.
3. Supports the growth of non-profit organizations and welfare institutions.

How to Claim Rebate on Donations?

1. Ensure donations are made through a banking channel.
2. Retain documentation such as:
   • Donation receipts
   • Tax approval of the recipient organization
3. Mention the rebate under the respective section in your tax return.

FAQs about Rebate on Donations

1. What types of donations qualify for tax rebates? Donations to approved institutions, including cash or in-kind contributions.

2. Can I claim a rebate for donating to an unregistered charity? No, only donations to tax-approved organizations are eligible.

3. What is the maximum rebate an individual can claim? Up to 30% of taxable income (15% for donations to associates).

4. Are donations in kind, like property, eligible? Yes, FMV of the property is considered.

5. Can companies claim tax rebates on donations? Yes, up to 20% of taxable income (10% for donations to associates).

6. How is the average tax rate calculated? By dividing the tax liability by taxable income.

7. Is a receipt necessary for claiming the rebate? Yes, receipts are mandatory for verification.

8. Can donations to foreign charities qualify? No, only Pakistan-based organizations are eligible.

9. Are Zakat payments eligible under Section 61? No, Zakat has a separate treatment under tax laws.

10. What if my donation exceeds 30% of my taxable income? Only the amount up to 30% is eligible for a rebate.

11. Do rebates apply to one-time donations only? No, they apply to all qualifying donations made during the tax year.

12. How are rebates for associate donations different? Rebates for associates are capped at 15% of taxable income.

13. What documents are required for claiming rebates? Donation receipts, approval letters of organizations, and proof of payment.

14. Can I carry forward unused rebates? No, rebates are applicable only for the year of the donation.

15. Do all welfare organizations qualify? No, only organizations approved by the tax authorities.