Opinion

Raising money efficiently via crowdfunding platforms

Dhaval Udani | Updated on October 19, 2021

Dhaval Udani, Founder & CEO of danamojo

These have many lessons for prospective individuals who use crowdfunding platforms to raise money and for the donors

Crowdfunding as a mode of raising and giving donations has increased exponentially especially over the last year with various folks raising and giving donations towards COVID-19. However, it is very important to be aware of the tax implications and the law while doing so to ensure that most of the money reaches the end beneficiary and you do not fall foul of the law. This is important for both fundraisers and donors to keep in mind.

Recently you would have read about Rana Ayyub & Sonu Sood falling into trouble with the tax authorities for their manner of collecting donations via crowdfunding platforms. These have many lessons for prospective individuals who use crowdfunding platforms to raise money and the donors who give to these fundraisers. These broadly fall into 2 categories:

● Taxation of money raised on crowdfunding platforms

● Regulation around FCRA Donations

Taxation of money raised on crowdfunding platforms

Rana Ayyub raised Rs. 2.7 cr in donations and had to pay tax of Rs. 90 lacs. So for all practical purposes, all those who donated to her campaign saw 1/3rd of the donation not going towards the intended cause.

This is very important for all individual fundraisers to note – if you collect donations in your account you have to pay income tax on the same. Not to mention the increased scrutiny you will receive from the Income Tax authorities for receiving money in your bank account in the first place. Further when you give this money to a beneficiary that beneficiary too might have to pay income tax on the same. Let us explain this with 3 models.

 

Scenario 1 is the worst-case scenario – some of this is averted in Scenario 2 with either the fundraiser transferring the money from his/her account directly to the hospital (in which case the second level of tax does not kick in but yet 34% is lost to tax) or the crowdfunding platform itself transfers the money to the hospital in which case no money is lost to tax. This is what most crowdfunding platforms do. But this may not always be possible based on what the money is raised for – it could be raised for education of children, taking care of stray dogs etc.

A simple way to avert this issue is by finding an NGO (Scenario 3) that works in the area that you want to raise money for. This has 2 benefits:

● No taxation in the hands of the fundraiser as donations are collected by the NGO

● No taxation in the hands of the beneficiary as amounts transferred by NGOs are not subject to tax

And there is one HUGE advantage – donors will get a tax benefit receipt entitling them to tax savings on their donation. Tax savings of 50% of the donated amount are available. This means that if you donate Rs. 10,000 you can reduce your total taxable income by Rs. 5000. And if you are in the highest tax bracket of 30% it will reduce your donor’s tax liability by Rs. 1,500. This means more money available for donation!

The higher amount to the beneficiary and the tax-saving for the donor is a win-win for both giver and receiver and is what you as a fundraiser should aim for.

● FCRA Donations

As an individual fundraiser, you are not allowed to raise donations from Foreign Citizens without having an FCRA certificate. Period! So while raising money ENSURE that your crowdfunding platform does not allow any foreign citizen to donate to your campaign.

Things to keep in mind for fundraisers while raising money

● Find an NGO who can channel donations to the cause you are working with to maximize the amount reaching the NGO – If you are raising funds for an individual, you can use India Cares, a reputed well-known NGO which provides this facility at a cost of 2-3% of the funds channeled. You can raise money through your favourite crowdfunding platform while selecting India Cares as the recipient of the donation.

● Ensure that the NGO has an 80G certificate – This will ensure that your donors will get a tax benefit as well. India Cares has an 80G certificate and can provide your donors with a tax benefit.

● Preferable if the NGO has FCRA – If the NGO has FCRA it would be preferable since it would allow your friends and family abroad to also donate for the organization. If the NGO does not have FCRA, check with your crowdfunding platform that no foreign citizen can donate through this fundraiser. This is VERY IMPORTANT. However Indian citizens residing abroad can yet donate in any currency.

Things for donors to keep in mind while contributing to fundraisers on crowdfunding platforms:

● Ensure that the campaign is for an NGO – If its important for you that most of your contribution should go to the end beneficiary then only give for campaigns where the end beneficiary is an NGO

● Ensure that the NGO has an 80G certificate – If a tax benefit is important to you, you need to make sure that the NGO has an 80G certificate. Most crowdfunding platforms will indicate this with a clear mention on the campaign. Donate towards campaigns which provide you with tax benefits.

● If you are a foreign citizen, ensure that the NGO/person you are contributing towards has an FCRA – If the NGO/person does not have FCRA they are in violation of the law to receive foreign contributions and could land them or you in trouble or your contribution may get refunded later.

Crowdfunding Platforms have evolved as a great way to raise money for various causes. Many times we are too concerned by the 5-10% taken by the crowdfunding platforms but forget that raising money the wrong way can result in 30%+ of the money not reaching the end beneficiary. So raise money. But raise it wisely.

The author is the Founder & CEO of danamojo – an Integrated Payment Solutions Platform for NGOs.

Published on October 19, 2021

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