My relative was diagnosed with a rare form of cancer requiring treatment of several lakhs. To support him, a few extended family members plan to create a corpus of ₹20 lakh to ensure a regular income stream to meet his basic expenses. Against this backdrop, kindly advise on the following:
1. Will the corpus we create be taxable? Who will be taxed if it is taxed at all?
2. This relative is the sole breadwinner of his family and operated an autorickshaw for his livelihood. So, we are also exploring crowdfunding to meet the expenses. What will be the financial or tax implications?
3. Is there any other tax-free means for him to raise funds to meet hospital expenses?
The taxability needs to be examined at two stages—one at the pooling stage, and two, at the time of receipt by the patient. Under section 56(2)(x), a receipt by a person without consideration in excess of ₹50,000 is taxable as income from other sources.
If the money is not received by the patient, but his medical bills are directly borne by the group of relatives, then the amount spent on his medical treatment would not be taxable in his hands.
Relatives pooling together funds for a common purpose of spending for medical relief of a relative can also claim exemption for the pooled funds kept in a common account on the grounds of mutuality.
Practical difficulties may arise as to who would be regarded as the owner of the bank account for tax purposes. The group of relatives may be regarded as a body of individuals, and may need to obtain a separate Permanent Account Number (PAN). The investment income would be taxable in the hands of such body of individuals.
Crowdfunding is raising of funds from a large number of donors or investors where each donor or investor contributes a small amount. Any amount received from crowdfunding may be sought to be taxed by the tax authorities in the hands of the person receiving it as income from other sources.
Furthermore, if the funds are received by a common group of people, then funds received may be taxed in the hands of a Body of Individuals. While it is possible to argue that the money received is not without consideration, since it is received with an obligation to spend it for the purpose for which it was received, the issue being highly debatable, may be subject to litigation.
In case of crowdfunding for medical expenses, such as this case, one can consider undertaking the crowdfunding through a charitable trust, which is registered for exemption with the income tax department.
In such a case, the funds received by the trust would be exempt and the disbursement of such funds to your relative, being applied by the trust for its charitable purposes would also be exempt in the hands of your relative. However, one would need to ensure that the trust for such crowdfunding has such medical treatment as one of its objects.
Mahesh Nayak is director at CNK & Associates LLP
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