In a vast country like India, where crowdfunding is a new concept, it is normal to get doubts about the laws and the taxes associated with this practice. Modern day crowdfunding takes place online and it is changing the whole scenario of fundraising. Before knowing the taxes and the legalities associated with this practice, make yourself familiar with these terms:
Define crowdfunding?
Crowdfunding is the practice of raising funds from individuals who support your cause.
We're already aware of the fact, that crowdfunding is the best form of fundraising. There may be tons of other ways to raise funds, but crowdfunding is the most popular practice among the lot. In a country like India, crowdfunding is slowly gaining its momentum.
Crowdfunding can be done for any cause. Whether it is your personal or a charitable one, crowdfunding suits everything.
Types of Crowdfunding:
There are mainly 4 different types of crowdfunding,
1)Equity-based crowdfunding
2)Donation-based crowdfunding
3)Debt-based crowdfunding and
4)Reward-based crowdfunding
1) Equity crowdfunding:
Equity crowdfunding is the process of raising funds from individuals and in return giving them a share of equity in the company. This type of equity-based online crowdfunding is banned in India and is completely legal in the United States.
2) Donation-based crowdfunding:
As the name itself suggests, donation-based crowdfunding is nothing but raising funds from individuals as donations. There's nothing given in return to the people, apart from a thank you note. In this type of crowdfunding, people come forward to support the cause without expecting anything in return.
3)Debt-based crowdfunding:
In this method of crowdfunding, the donors are known as investors. These investors believe your cause and invest money in it. In return, there's an interest mechanism setup which gives them interest on their money every month.
4)Reward-based crowdfunding:
Reward-based crowdfunding is mostly practiced by creative people like Artists, Musicians, Game developers.etc. In this type of crowdfunding, people donate money and expect a reward in return. The reward can be anything ranging from the first copies of the album or the pre-released version of the games.etc
These are the 4 types of crowdfunding one should know, before raising funds via this practice.
Crowdfunding regulations and taxation:
In India, the practice of crowdfunding is regulated by a regulatory body known as SEBI. Securities and Exchange Board of India(SEBI) was established as a non-statutory body in 1988. It was given statutory powers in the year 1992 after the SEBI Act 1992 was passed by the Indian Parliament. It is the regulator for securities market in India.
and according to SEBI:
"Crowdfunding is solicitation of funds (small amount) from multiple investors througha web-based platform or social networking site for a specific project, business ventureor social cause."
The payments of donations are covered by the provisions of the income tax act. One can get tax benefits whilst contributing via crowdfunding.
As there are many NGOs/ nonprofits in India, most of them are entitled to provide tax exemption certificates to donors. These nonprofits may use crowdfunding platforms and if a person contributes to these causes, then he is entitled to receive tax benefits. Donations paid to specific organizations qualify for tax relief under section 80G.
Donations and tax deductions:
There are 4 specific kinds of donations which are eligible for the tax deduction that comes under section 80G:1) 100% tax deduction without limit:
A person gets 100% deduction in tax amount if he contributes to causes like "Prime Minister’s National Relief Fund".etc2) 50% tax deduction without limit:
A person gets 50% deduction in tax amount if he contributes to causes like "Indira Gandhi memorial trust".etc
3) 100% tax deduction with limit:
Anyone who contributes towards an approved institution which is promoting family planning gets 100% tax deduction but with the subject to a qualifying limit.4) 50% tax deduction with limit:
Anyone who donates towards an approved charitable trusts, other than family planning gets 50% tax deduction but with the subject to a qualifying limit.Even NRIs are also entitled to tax benefits against donations.
If you want to get started with crowdfunding then visit milaap.org and start a fundraiser for your cause!
