Income Tax on Political Parties, Electoral Trusts, Electoral Bonds 

Political Parties, Electoral Trusts, Electoral Bonds and deductions/ Exemptions under the Income Tax Act, 1961

Political Parties and Election campaigns are an integral part of Indian democratic system. Let’s discuss in detail about the meaning, sources of income, taxability, exemptions and deductions to political parties, electoral trusts and electoral bonds.

Political Party

• Definition – An association of Indian Citizens which has registered itself with the election commission under section 29A of the Representation of the People Act, 1951.

• Sources of Income – Mainly voluntary contributions from individuals and corporates.
• Examples – BJP, INC, NCP, Shiv Sena, AAP etc.
• Taxability – U/s 13A Political parties are exempted from paying income tax on its income from house property, voluntary contributions received, income from other sources and capital gains.
• Return of Income – Political parties are required to file their return of income u/s 139(4B) if its income exceeds maximum amount not chargeable to tax (without considering section 13A exemption)
• Signing of return of income – The return of income should be signed and verified by Chief Executive Officer of the political party.
• Applicable ITR – ITR 7 is applicable to political parties for furnishing their return of income.
• Deductions/ Exemption for donors – The corporate donors can claim deduction u/s 80GGB for amount of donation made to political parties. Other persons (except local authority and artificial juridical person funded by government) can claim deduction u/s 80GGC.

Electoral Trust

• Definition – An Electoral Trust is a non profit organisation established for orderly receipts of the voluntary contributions from any person for distributing the same to political parties, registered under section 29A of the Representation of People Act, 1951.
• Operation – An Electoral Trust receive voluntary contributions and distribute the same to political parties.
• Eligible Donors – The Electoral Trust may receive voluntary contributions from an individual who is citizen of India, a company registered in India and a firm, HUF, association of persons or body of Individuals resident in India. It shall not accept any contributions from an individual who is not citizen of India, from any foreign entity whether incorporated or not and from any other electoral trust.
• Exemptions – Any voluntary contributions received by an Electoral Trust are exempt u/s 13B of the Income Tax Act, 1961 provided the Trust distributes 95% of the aggregate donations received and previous year surplus if any to political parties registered u/s 29A of the representation of Peoples Act, 1951 and it functions in accordance with rules made by Central Government.
• Deductions – Deductions u/s 80GGC/80GGB would be available for amount contributed to Electoral Trust.

Electoral Bonds

• Definition – Electoral bond is a financial instrument issued by scheduled commercial banks upon authorization from the Central Government to intending donors for making donations to political parties only against cheque and digital payments.
• Objective – The bonds are introduced with the primary intention of  addressing the concerns of the donors to remain anonymous.
• Eligibility to purchase the bonds – The bond can be purchased by a citizen of India or a body incorporated in India.
• Availability – The electoral bonds can be purchased in multiples of Rs. 1000, Rs. 10000, Rs. 100000, Rs. 1000000 or Rs. 10000000.
• Life of the bonds – The bond can be cashed via the political parties verified account within 15 days.
• Purpose – Electoral bonds can be used for making donation only to political parties registered under section 29A of the Representation of Peoples Act, 1951 and which secured not less than one per cent of the votes polled in last general elections.
• Confidentiality – The bond will not carry name of the payee.  The information of the buyer shall not be disclosed to any authority except when demanded by competent court or upon registration of criminal case by any law enforcement agency.
• Deductions – Deductions u/s 80GGC/80GGB would be available for amount contributed trough electoral bonds to individuals/ companies.
• Impact on unaccounted money and  transparency in political funding – The bonds have to be bought in after fulfilling relevant KYC, they cannot be bought through cash or unaccounted money. However, donations in cash can still be received by political parties of amount less than Rs. 2000/-.

Also, the political parties are not required to disclose the name of the person making the donation through electoral  bonds however, the bonds are to be physically submitted to     the political party by the donor. This way the bonds can increase the anonymity of political donations.

Also, the recent amendments have removed the ceiling of  7.5% net profit that can be donated to political parties thereby enabling the companies to donate any amount of profit to political parties. Electoral bonds will also help them    to remain anonymous.

Hence the net impact of electoral bonds can be summarized as decreased transparency without assurance of  arresting flow of unaccounted money.

Exemptions and Deductions under The Income Tax Act, 1961

Exemption  to Political Parties and Electoral Trust – As discussed earlier, section 13A has given complete exemption to political parties from paying income tax on its income from house property, voluntary contributions received, income from other sources and capital gains.

However, it is subject to fulfillment of following conditions –

• Maintain books and accounts sufficient for AO to arrive at its income.
• Get books audited by a Chartered Accountant.
• Maintain records of each contribution more than Rs. 20,000.
• Furnish a report of donations in excess of Rs. 20000 to the election commission before due date of return filing.
• Should not receive any donation more than Rs. 2000 in cash.

Similarly, any voluntary contributions received by an Electoral Trust are exempt u/s 13B of the Income Tax Act, 1961 provided

• The Trust distributes to political parties registered u/s 29A of the representation of Peoples Act, 1951 ,95% of the aggregate donations received and previous year surplus if any
• It functions in accordance with rules made by Central Government.

Deductions u/s 80GGB and Section 80GGC

Any indian company that donates to political party  or electoral trust can claim deduction u/s 80GGB for amount contributed provided

• The donations are not made in cash.
• Amount is paid through acceptable route and documentary record is available.
• The political party is duly registered u/s 29A of the representation of Peoples Act, 1951.

Similarly, deduction can be claimed u/s 80GGC by other person provided –

• The donations are not made in cash.
• Amount is paid through acceptable route and documentary record is available.
• The political party is duly registered u/s 29A of the representation of Peoples Act, 1951.

Hope you found the article helpful.

(The author is a chartered Accountant and can be reached at [email protected])