Summary: Section 12 of the Income-tax Act, 2025, read with Schedule VIII, deals with exemption of specified income of registered political parties and voluntary contributions received by approved electoral trusts. The recipient-side exemptions correspond broadly to Sections 13A and 13B of the Income-tax Act, 1961, whereas donor deductions now fall under Sections 136 and 137 instead of Sections 80GGB and 80GGC. Political parties must maintain proper books and donor records, obtain an audit, observe the ₹2,000 cash-donation restriction, submit the prescribed contribution report and file their return in time. Electoral trusts must meet the 95% distribution test and the operating conditions under Rule 289 of the Income-tax Rules, 2026. Interest earned by an electoral trust is not covered by the contribution exemption. For donors, the payment must be non-cash, the recipient must qualify and the donor’s applicable tax regime must permit the deduction. Corporate political contributions additionally require compliance with Section 182 of the Companies Act, 2013. Practical examples illustrate the interaction of the exemptions, distribution test, cash restrictions, company-law limits and concessional tax regimes.
Section 12 of the Income-tax Act, 2025: Political Parties, Electoral Trusts and Donor Deductions – Comparison with Sections 13A, 13B, 80GGB and 80GGC of the Income-tax Act, 1961
- 1. Two questions every political donation raises
- 2. What income is covered?
- 3. Political parties
- Conditions to be satisfied
- 4. Electoral trusts
- The 95% distribution test
- What about interest earned by the trust?
- 5. What if a condition is not met?
- 6. Comparison with the Income-tax Act, 1961
- 7. The donor's side: Sections 136 and 137
- Section 136: Contribution by an Indian company
- Section 137: Contribution by other persons
- The regime trap
- 8. Old section, new section: at a glance
- Checklist before signing off:
- 9. The working rule
1. Two questions every political donation raises
Every political donation raises two separate tax questions. Is the recipient taxed on what it receives? And can the person who gave the money claim a deduction?
The Income-tax Act, 2025 answers the first question in Section 12, read with Schedule VIII. It answers the second in Sections 136 and 137.
Under the 1961 Act, these were Sections 13A and 13B (recipients) and Sections 80GGB and 80GGC (donors). The substance is largely the same; the arrangement has changed.
In practice, the exemption is never automatic. Over the years, I have seen more trouble arise from a missed condition than from any dispute on the law itself.
2. What income is covered?
The scope of the exemption depends on who the recipient is.
| Recipient | Income covered by Section 12 |
|---|---|
| Political party (registered under Section 29A of the Representation of the People Act, 1951) | Income from house property, capital gains, income from other sources and voluntary contributions |
| Electoral trust | Voluntary contributions only |
A party’s exemption goes beyond donations to rent, interest and capital gains, but not business income.
An electoral trust is only a conduit, so its exemption covers contributions alone.
3. Political parties
Example 1: A registered political party has these receipts in a tax year:
| Particulars | Amount (₹) |
|---|---|
| Voluntary contributions | 40,00,000 |
| Interest on bank deposits | 1,50,000 |
| Rent from party-owned property | 3,00,000 |
| Capital gains on sale of investments | 2,00,000 |
| Total | 46,50,000 |
If every condition below is met, the full ₹46,50,000 is exempt. Registration only opens the door; the conditions decide the outcome.
Conditions to be satisfied
1. Books of account: The party must keep books and documents that let the Assessing Officer work out its income properly.
2. Record of large donations: For each voluntary contribution above ₹20,000, the party must keep the donor’s name and address.
3. Audit: The accounts must be audited by an accountant.
4. Mode of receipt: A donation above ₹2,000 must come through an account-payee cheque, an account-payee draft or an eligible electronic mode.
5. Contribution report: The treasurer or an authorised person must file the report under Section 29C(3) of the Representation of the People Act, 1951.
6. Return of income: The return must be filed under Section 263 of the 2025 Act within the due date.
A note on electoral bonds: Schedule VIII still mentions them, but the Supreme Court struck down the scheme in February 2024. The reference does not revive it.
Example 2: At a rally, a party collects ₹1,500 in cash from each of 400 supporters, and ₹5,000 in cash from one more. The ₹6,00,000 is fine if properly recorded. The ₹5,000 breaches the ₹2,000 limit and should have been taken by UPI or cheque.
Check all six together. Clean books do not cure a late return.
4. Electoral trusts
An electoral trust collects contributions and passes them on to registered political parties. Before anything else, it must be a Section 8 company approved by the CBDT under the Electoral Trusts Scheme, 2013. Without that approval, Section 12 does not come into play at all. Once approved, its voluntary contributions are exempt only if it:
- distributes the prescribed share to parties registered under Section 29A; and
- functions in line with the rules made by the Central Government, now Rule 289 of the Income-tax Rules, 2026.
The 95% distribution test
The trust must distribute at least 95% of the donations received in the tax year, plus any surplus brought forward from earlier years.
Example 3:
| Particulars | Amount (₹) |
|---|---|
| Contributions received during the year | 1,00,00,000 |
| Surplus brought forward | 10,00,000 |
| Aggregate amount | 1,10,00,000 |
| 95% of the aggregate | 1,04,50,000 |
If the trust distributes only ₹90 lakh, it falls short by about ₹14.5 lakh on this basic working.
This is a first cut. Rule 289 allows management expenditure of up to 5% of the year’s contributions, capped at ₹5 lakh in the first year and ₹3 lakh after that. Distribution must be completed by 31 March of the tax year.
What about interest earned by the trust?
Example 4: A trust receives ₹1 crore in contributions and earns ₹3 lakh interest on a fixed deposit while the money waits to be distributed.
The ₹3 lakh interest is not exempt just because the trust met the 95% test. It is taxed under the normal provisions.
This is the most common slip I see: trustees treat the whole bank balance as “exempt money”.
5. What if a condition is not met?
Section 12(2) is short and strict. If a condition in Schedule VIII is not satisfied for income covered by the Schedule, that income becomes taxable for that tax year.
Example 5: Take the party in Example 1. Its books are in order and its accounts are audited, but the return is filed three months after the due date.
The late return breaches a Schedule VIII condition, so the full ₹46,50,000 is at risk.
For an electoral trust, the usual triggers are a shortfall in distribution or a departure from Rule 289.
In each case, identify exactly which condition failed and apply the statute to that failure.
6. Comparison with the Income-tax Act, 1961
| Particulars | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Exemption for political parties | Section 13A | Section 12 read with Schedule VIII |
| Exemption for electoral trusts | Section 13B | Section 12 read with Schedule VIII |
| Party’s eligible income | House property, capital gains, other sources, voluntary contributions | Same categories |
| Trust’s eligible income | Voluntary contributions | Voluntary contributions |
| Return filing provision | Section 139(4B) | Section 263 |
| Trust distribution rule | 95% test under Section 13B, with Rule 17CA of the 1962 Rules | 95% test under Schedule VIII, with Rule 289 of the 2026 Rules |
The real change is structural. Two separate sections have become one, and the conditions now sit in a Schedule. For students, the safest way to remember it is simple: 13A + 13B = Section 12 + Schedule VIII.
7. The donor’s side: Sections 136 and 137
A party’s exemption says nothing about the donor’s deduction; each is tested on its own.
Section 136: Contribution by an Indian company
An Indian company may claim a deduction for any sum contributed, otherwise than in cash, to a registered political party or an electoral trust. “Contribute” takes its meaning from Section 182 of the Companies Act, 2013.
So before claiming it, check that:
- the company is not a Government company and has existed for at least three financial years;
- the contribution is within 7.5% of its average net profits of the three preceding financial years; and
- the board has passed a resolution and the amount is disclosed in the profit and loss account.
The 7.5% ceiling, removed in 2017, was restored by the Supreme Court in February 2024.
Example 6: ABC Ltd. has average net profits of ₹1 crore for the last three years. It contributes ₹5 lakh to a registered party by bank transfer, after a board resolution. The amount is within the ₹7.5 lakh limit, so it may claim ₹5 lakh under Section 136.
Section 137: Contribution by other persons
Any other assessee may claim a deduction for a sum contributed, otherwise than in cash, to a registered party or an electoral trust. Two categories are excluded: a local authority, and an artificial juridical person wholly or partly funded by the Government.
Example 7: Mr A, a salaried professional, pays ₹50,000 to a registered party through UPI. He has opted out of the default regime. He may claim ₹50,000 under Section 137.
A cash contribution gets no deduction under either section, whatever the amount.
In practice, clients often hand over a party receipt and assume the deduction follows. The receipt only proves the payment. Before claiming it, I check three things: how it was paid, whether the party is registered under Section 29A, and which tax regime the client is in.
The regime trap
Most wrong claims arise here: the deduction is available only if the donor’s tax regime allows it.
Example 8: Mr B makes the same ₹50,000 UPI payment as Mr A, but stays in the default regime under Section 202. He gets no deduction. The payment mode was correct; the regime rules it out.
Example 9: XYZ Ltd. pays tax at 22% under Section 200 and contributes ₹10 lakh to a party by cheque. The concessional regime does not allow this deduction, so the ₹10 lakh cannot be claimed under Section 136. The same applies under Section 201.
Also keep in mind that the total of all deductions under the Chapter is capped at the gross total income, under Section 122. A deduction cannot create a loss.
8. Old section, new section: at a glance
| Provision (2025 Act) | Old provision (1961 Act) | What it deals with |
|---|---|---|
| Section 12 + Schedule VIII | Section 13A | Exemption for specified income of political parties |
| Section 12 + Schedule VIII | Section 13B | Exemption for voluntary contributions of electoral trusts |
–
| Provision (2025 Act) | Old provision (1961 Act) | What it deals with |
|---|---|---|
| Section 136 | Section 80GGB | Deduction for non-cash contributions by Indian companies |
| Section 137 | Section 80GGC | Deduction for non-cash contributions by other eligible persons |
Checklist before signing off:
- Party: books, donor records above ₹20,000, audit, ₹2,000 receipt rule, Section 29C report and timely return all in place
- Trust: full Rule 289 working done and 95% test met; interest income dealt with separately
- Donor: payment not in cash; Section 182 limits checked for companies; tax regime permits the deduction
9. The working rule
Section 12 gives parties and trusts a valuable exemption, but only on terms. Sections 136 and 137 then decide the donor’s position, where payment mode and tax regime matter as much as the donation.
Whenever a political contribution comes up, start with two questions: who received it, and who paid it? Answer each separately, and most of the confusion in this area disappears.
Statutory references: Income-tax Act, 2025 — Sections 12, 122, 136, 137, 200 to 202 and 263, read with Schedule VIII; Income-tax Rules, 2026 — Rule 289; Income-tax Act, 1961 — Sections 13A, 13B, 80GGB and 80GGC; Companies Act, 2013 — Section 182; Representation of the People Act, 1951 — Sections 29A and 29C. Verify the law, rules and notifications in force for the relevant tax year before relying on this note for a return or opinion.
