A former long-term resident of Germany, who spent approximately two decades living there before returning to India during the Covid-19 pandemic, seeks to renew support for humanitarian causes by donating ₹5 lakh to the German Red Cross before Christmas. The individual, who has always been deeply committed to social and humanitarian initiatives, wants to understand potential tax complications arising from this international charitable contribution.
No Direct Tax Liability But No Deduction Benefits
Making a donation to the German Red Cross does not create direct tax liability for the donor in India. However, the contribution will not qualify for tax deduction benefits under Indian law. This limitation exists because the German Red Cross is established overseas and lacks registration under Indian legislation governing charitable organizations.
The crucial distinction lies in the recognition status—only donations to institutions registered and approved under the Income Tax Act, 1961, qualify for deductions in India. Since the German Red Cross operates as a foreign charity, Indian taxpayers cannot claim this donation as a deduction when filing their annual returns.
The Deeming Provision and TDS Requirements
Indian tax regulations contain a significant deeming provision that treats payments made by residents to non-residents without consideration as income deemed to accrue or arise in India. This rule specifically excludes payments to Indian-registered charitable entities, but since the German Red Cross qualifies as a foreign charity, this exclusion does not apply.
Consequently, the ₹5 lakh donation could be treated as income without consideration and deemed to accrue in India in the hands of the German Red Cross. This classification triggers potential Tax Deducted at Source (TDS) obligations for the donor. The German Red Cross, being an unregistered non-profit organization from India's perspective, would likely be regarded as an Association of Persons (AOP) for tax purposes, attracting a standard TDS rate of 30% plus applicable surcharge and cess.
Relief Through India-Germany Tax Treaty
The situation may find resolution through the India-Germany Double Taxation Avoidance Agreement (DTAA). The German Red Cross can seek relief under this bilateral treaty provided it qualifies as a tax resident of Germany. Given that the organization operates under the German Federal Tax Code and enjoys exemption from corporate tax in its home country, it meets the criteria for German tax residency under DTAA provisions.
Under the treaty, such income typically falls under the "Other Income" article, which grants Germany exclusive taxing rights. If the German Red Cross provides a Tax Residency Certificate (TRC) and submits Form 10F, the donation would be taxable only in Germany, eliminating the need for TDS deduction in India.
Tax Collected at Source Under LRS
Even if TDS obligations are waived through DTAA benefits, the donation still qualifies as a remittance under India's Liberalised Remittance Scheme (LRS). This classification makes the provisions of Tax Collected at Source (TCS) applicable. Importantly, when TDS applies and has been deducted, TCS is not levied. However, in scenarios where TDS doesn't apply due to DTAA relief, TCS becomes relevant.
TCS under LRS applies only when total remittances exceed ₹10 lakh in a single financial year per PAN, excluding amounts spent on overseas tour packages. The authorized dealer bank would collect TCS at 20% on the amount exceeding this threshold. Donors can later claim any TCS paid as credit when filing their income tax returns for the relevant assessment year.
For this specific case involving a ₹5 lakh donation, the donor should coordinate with their bank to understand the exact TCS implications based on their total overseas remittances during the financial year. Proper documentation from the German Red Cross, including the Tax Residency Certificate, will be crucial to avail DTAA benefits and streamline the donation process while remaining compliant with Indian tax regulations.
