Comparative Taxation of Trusts and Political Donations: India vs USA

India and the United States 🇺🇸 take very different paths on the taxation of trusts and the tax value of political donations, even though both countries use tax law to steer money toward public causes. India’s approach under the Income-tax Act, 1961 leans on a mix of tax exemption for public charitable and religious trusts and targeted deductions for donors, including a special push for non-cash political funding. The U.S. Internal Revenue Code (IRC), on the other hand, keeps charity and politics in separate lanes: it offers tax breaks for gifts to recognized charities but gives donors no deduction for money given to political parties or candidates. This split matters for families setting up trusts, companies planning corporate giving, and everyday taxpayers deciding how to give.

Core structural difference: public vs private and grantor vs non-grantor

• India separates public charitable/religious trusts and private family trusts.
  • Public trusts that are registered and meet application rules can keep income tax-free, subject to use requirements.
  • Private trusts are taxed under provisions that depend on whether beneficiary shares are determinate (fixed) or indeterminate (discretionary).
• The U.S. separates grantor trusts and non-grantor trusts under the IRC.
  • Grantor trusts (IRC §§671–679) attribute income to the grantor’s return.
  • Non-grantor trusts are separate taxpayers; distributed income is taxed to beneficiaries (IRC §§651–652), while retained income is taxed to the trust at compressed trust rates.

India: key provisions and rules

• Public charitable trusts:
  • Must satisfy Sections 11–12 and be registered under Section 12AB to claim exemption.
  • Required to apply at least 85% of income annually for approved purposes (limited carryforward allowed).
  • Donors to eligible trusts can claim deductions under Section 80G — typically 50% or 100% deduction depending on the trust’s approval category.
• Political parties and donations:
  • Political parties can be tax-exempt under Section 13A if they keep books, file returns under Section 139(4B), and refuse cash donations above ₹2,000.
  • Donors get a 100% deduction for non-cash political donations under Section 80GGC (individuals) and Section 80GGB (companies), including transfers through banking channels or electoral bonds.
  • Cash donations do not qualify for deduction; the system encourages traceable, non-cash funding.
• Private/family trusts:
  • Taxed under Sections 160–166.
  • If shares are determinate, trustee is a representative assessee taxed at beneficiaries’ slab rates (Section 161(1) et al.).
  • If shares are discretionary, the trust faces the Maximum Marginal Rate (MMR) under Section 164(1).
  • Judicial support: Supreme Court in CIT v. Kamalini Khatau (MMR for discretionary trusts) and Bombay High Court in CIT v. Marsons Beneficiary Trust (determinate trust income taxed at beneficiary rates).

U.S.: key provisions and rules

• Trust taxation:
  • Grantor trusts (IRC §§671–679) attribute income to the grantor.
  • Non-grantor trusts pay tax on retained income at compressed trust brackets (see IRC §1(e)); distributed income is taxed to beneficiaries under IRC §§651–652 using Distributable Net Income rules.
• Charities and donors:
  • Registered charities under IRC §501(c)(3) are exempt if they avoid private benefit and political campaign activity.
  • They pay tax on unrelated business income under IRC §§511–514.
  • Donors claim charitable deductions under IRC §170, subject to AGI limits (e.g., up to 60% of AGI for cash gifts to public charities in many cases).
• Political giving:
  • Political organizations qualify under IRC §527, but donors receive no deduction for political contributions (IRC §162(e)).
  • Federal Election Commission (FEC) limits apply (see next section), and political contributions have separate reporting and disclosure regimes.

• Compliance and reporting:
  • Charities file Form 990 annually to report programs, governance, and finances. For more info see Form 990 (IRS).

How the rules apply to political funding

India:
– Political parties complying with Section 13A can be income-tax exempt.
– Donors using banking channels or electoral bonds can claim a full deduction under Section 80GGC/80GGB.
– The ₹2,000 cash cap and return filing under Section 139(4B) reduce anonymous cash donations and promote traceability.
– VisaVerge.com analysis notes this structure aims for transparency while providing tax incentives for formal political support.

United States:
– Political committees are tax-exempt under IRC §527, but donors get no deduction (IRC §162(e)).
– FEC contribution limits (2023–24 cycle examples):
– $3,300 per election to a candidate
– $10,000 per year to state/local party committees
– $41,300 per year to national party committees
– Cash donations capped at $100
– The policy: allow political giving but exclude it from tax deductions, with contribution caps and reporting to ensure transparency.

Numeric examples to illustrate effects

India examples:
1. Public charitable trust:
– Trust earns ₹1 crore, uses ₹90 lakh for approved work (meets the 85% rule). Income is exempt under Section 11 if registered under Section 12AB.
2. Donor to charity:
– Donor gives ₹5 lakh to a trust with valid Section 80G status → may claim 50% or 100% deduction depending on approval.
3. Private trust:
– Determinate trust with three beneficiaries and income ₹9,00,000 → ₹3,00,000 taxed in hands of each beneficiary via trustee (Section 161(1)).
– Discretionary trust with same income → entire ₹9,00,000 taxed at MMR under Section 164(1).

U.S. examples:
1. Grantor trust:
– Investment income reported on grantor’s Form 1040 per IRC §§671–679.
2. Non-grantor trust:
– Distributes income → beneficiaries taxed under IRC §§651–652; retained income taxed to the trust at compressed rates (IRC §1(e)).
3. Charity and politics:
– Donor gives $6,000 to public charity → deductible under IRC §170 (subject to AGI limits).
– Donor gives $6,000 to candidate → allowed under FEC rules but no tax deduction (IRC §162(e)).

Comparative household example:
– Mr. A (India) and Mr. B (U.S.), each with income ≈ ₹50,00,000 (≈ $60,000), each give ₹5,00,000 (≈ $6,000):
– To a registered charity: Mr. A may deduct under Section 80G (reducing taxable income to ₹45,00,000, saving ~₹1,50,000 at 30%); Mr. B deducts under §170 (lowering taxable income to $54,000, saving ~$1,320 at 22%).
– To a political party: Mr. A may deduct full amount under Section 80GGC (non-cash); Mr. B gets no deduction, taxable income stays at $60,000.

Practical planning implications (India vs U.S.)

India:
– Trust design choice matters:
– Determinate trust → benefits taxed at beneficiaries’ slab rates.
– Discretionary trust → faces MMR unless narrow exceptions apply.
– Donor behavior:
– Use banking channels/electronic transfers or electoral bonds to secure 80GGC/80GGB deductions.
– Check Section 12AB registration and Section 80G approval for charities before donating.
– Corporate political donations:
– A company donating ₹50 lakh electronically to a party could claim the deduction under Section 80GGB, subject to documentation.

United States:
– Trust design:
– Choose grantor vs non-grantor based on whether grantor wants income taxed on personal return.
– Non-grantor trusts can shift tax to beneficiaries but face compressed trust brackets for retained income.
– Charitable giving:
– Favor qualified charities under IRC §170 to claim deductions within AGI limits (e.g., up to 60% of AGI for cash gifts to public charities).
– Political giving:
– Allowed, subject to FEC limits and reporting, but no tax benefit (treat as personal civic decision).

Compliance checklist and recordkeeping

India:
– Charitable trusts:
– Maintain records showing application of 85% of income.
– Keep and renew Section 12AB registration and comply with Sections 11–13 examiners’ requirements.
– Avoid private benefit and prohibited investments to retain exemption.
– Donors:
– Confirm current Section 80G approval; pay by traceable modes if seeking 80GGC/80GGB treatment.
– Political parties:
– File Section 139(4B) returns; refuse cash donations over ₹2,000.

United States:
– Charities:
– Avoid private inurement, monitor unrelated business income, file public Form 990.
– Donors:
– Confirm §501(c)(3) status for deductions; keep receipts (especially for gifts ≥ $250).
– Political committees:
– Follow FEC reporting and contribution limits.

Simple scenarios on the ground

• Indian salaried professional:
  • Donates ₹1,00,000 to a trust with Section 80G (50% category) → claim ₹50,000 deduction.
  • Transfers ₹1,00,000 to a political party via bank → claim ₹1,00,000 under Section 80GGC (non-cash).
• Mumbai family trust:
  • Fixed 25% shares per child → income taxed at each child’s slab rate (Section 161(1)).
  • Trustee discretion over distributions → trust faces MMR under Section 164(1).
• U.S. entrepreneur:
  • Gives $6,000 to a public charity → deductible under IRC §170 (subject to AGI rules).
  • Gives $6,000 to candidate committee → permitted by FEC limits but no deduction (IRC §162(e)).
• U.S. non-grantor trust:
  • Earns $30,000, distributes $20,000 → beneficiaries taxed on $20,000 (IRC §§651–652); trust taxed on retained $10,000 at higher trust rates.

Key takeaway: India’s tax system uses exemptions and deductions to encourage both charitable and traceable political giving, while taxing private trusts to discourage opaque wealth parking. The U.S. strongly encourages charitable giving through §170 and §501(c)(3) rules, but draws a firm line excluding political contributions from tax benefits and regulating them via election law.

Common critiques and policy trade-offs

• India:
  • Critics: Deductions for political giving may blur lines between tax policy and election finance.
  • Supporters: Tax incentives and donation caps encourage traceable, non-cash donations, which can improve transparency.
• United States:
  • Critics: Not allowing deductions for political gifts treats civic participation as less worthy than charity.
  • Supporters: The firewall protects the tax base and keeps election finance distinct from tax-favored public welfare spending.

Three practical steps for taxpayers

1. Check status before giving:
   • India: confirm Section 12AB registration and Section 80G approval; use traceable payment modes for political donations to qualify for 80GGC/80GGB.
   • U.S.: confirm §501(c)(3) status to claim §170 deductions; do not expect deductions for candidate or party contributions.
2. Keep records:
   • Save donation receipts and bank proofs.
   • India: ensure receipts show the trust’s 80G number and validity period.
   • U.S.: obtain contemporaneous written acknowledgement for gifts ≥ $250.
3. Design trusts intentionally:
   • India: choose determinate vs discretionary early—tax outcomes differ sharply.
   • U.S.: choose grantor vs non-grantor based on whether the grantor wants income taxed on their return or retained inside the trust.

Final observation

The two systems reflect different philosophies. India uses the Income-tax Act to reward both charitable giving and political donations when routed through transparent channels, while placing private family trusts under stricter tax rules to prevent misuse. The U.S. uses IRC §170 and §501(c)(3) to promote public-benefit giving and public reporting, but deliberately bars tax deductions for political giving so campaign finance is managed outside tax incentives. For families, businesses, and community groups operating in either country, the practical message is consistent: pick the right vehicle for your goals, follow the applicable rules, and keep thorough records. The tax results will follow those choices—by design.