Income Tax Department Cracks Down on Dubious Political Donations: What Donors Must Know
The Income Tax (I-T) Department is tightening the screws on individuals and entities claiming tax deductions for political donations. Thousands of donors who contributed ₹5 lakh or more to lesser-known political parties during FY 2020-21 are now under the scanner. Here’s a breakdown of the investigation, its implications, and how taxpayers can protect themselves.
Page Contents
Why the Scrutiny?
The I-T Department suspects a money laundering racket where donors allegedly routed black money through political parties. The modus operandi:
- Donors write cheques to obscure political parties.
- Parties return the amount in cash after deducting 1-3% as commission.
- Donors claim tax deductions under Section 80GGC (for individuals) or 80GGB (for companies), effectively lowering taxable income.
Over 9,000 individuals claimed deductions under Section 80GGC for donations ≥₹5 lakh in FY 2020-21. However, many recipient parties lacked basic credibility—some didn’t even contest elections in donors’ constituencies.
Key Questions the I-T Department is Asking
Tax notices demand detailed explanations, including:
- Who contacted you from the political party? Name the person.
- Did the party contest elections in your constituency?
- What due diligence did you perform before donating?
- How did you connect with the electoral trust/party?
- Submission of bank statements (FY21), audited financials (2019-22), and PAN/registration details of recipient parties.
Failure to justify donations could lead to:
- Rejection of tax deductions.
- Heavy penalties and income additions (treating the donated amount as undisclosed cash income).
Expert Advice: How to Respond
- Genuine Donors: Retain proof (acknowledgement receipts, party’s tax exemption certificate, bank transaction records).
- Doubtful Claims: File updated tax returns by March 2025 to withdraw deductions, pay due taxes, and avoid penalties.
- Due Diligence: Verify if the party contested elections in your area. Unrecognized parties with no electoral activity are red flags.
Tax experts warn: “If the donation isn’t genuine, taxpayers risk double trouble—losing deductions and facing income additions for undisclosed cash.”
They also add: “This isn’t just about FY 2020-21. The department may probe donations in other years too.”
The Bigger Picture
The I-T Department’s move aims to curb misuse of political funding channels for tax evasion. While donations to political parties are tax-free, the law mandates transparency. Donors must ensure:
- Parties are registered and issue receipts.
- Contributions align with genuine support, not tax-saving motives.
Takeaway
Political donations are legal, but using them as a tool for tax fraud invites severe consequences. Taxpayers must:
- Revisit past deductions claimed under Sections 80GGC/80GGB.
- Act before March 2025 to rectify discrepancies.
- Prioritize compliance over short-term tax savings.
Stay informed. Stay compliant.
Author Bio
