In this article, we will discuss the provisions of Income Tax Act, 1961 regarding deductions for donations made to a political party or electoral trust. Certain conditions have to be fulfilled by any taxpayer to be eligible for deduction for donation made to a political party or electoral trust. These conditions are prescribed by section-80GGB and 80GGC of the Income Tax Act. The article will through a light on the meaning of political party and electoral trust, what are the eligibility criteria for section-80GGB and 80GGC, who can claim deduction under section-80GGB and 80GGC, what is the quantum of deduction under section- 80GGB and 80GGC and other related terms.
What is a Political Party??
- A political party is an organized group of people who have the same ideology, or who otherwise have the same political positions, and who field candidates for elections, in an attempt to get them elected and thereby implement the party's agenda.
- In India, Political parties are registered and recognized by Election Commission of India under section-29A of the Representation of People Act, 1951.
- Therefore, before making any contribution to a political party, it must be ensured that such political party is duly registered with Election Commission of India.
What is an Electoral Trust??
- An Electoral Trust is a trust set up by companies with the sole objective to distribute the contributions received by it from other companies and individuals to the political parties. Electoral Trusts are designed to bring transparency in the funds provided by corporate entities to the political parties for their election related expenditures.
- The Central Government through 'The Electoral Trusts Scheme, 2013' specified the eligibility and procedure for registration of Electoral Trusts. Only such companies are eligible to make an application for approval as an Electoral Trust which are registered under section-8 of Companies Act, 2013.
- Electoral Trust can accept donations/contributions from the following:
(a) An Individual who is a citizen of India
(b) A Company registered in India
(c) A Firm (resident in India)
(d) Hindu Undivided Family (resident in India)
(e) Association of Persons (resident in India) - However, an electoral trust cannot accept contributions from the following:-
(a) Any person who is not an Indian Citizen
(b) Any Foreign entity
(c) Any other electoral trust
Now, we will first go through the provisions of section-80GGB of the Income Tax Act, 1961. Section-80GGB of the Income Tax Act states as below:-
"In computing the total income of an assessee, being an Indian company, there shall be deducted any sum contributed by it, in the previous year to any political party or an electoral trust.
Provided that no deduction shall be allowed under this section in respect of any sum contributed by way of cash."
On the basis of reading of the above provision, following questions arises in relation to section-80GGB as regards applicability and eligibility of this section on various classes of taxpayers:-
Who is eligible to claim deduction under section-80GGB??
- Only Indian Companies are eligible to claim deduction under section-80GGB.
- Indian company means any company registered or incorporated under any law related to companies in any part of India and also include any corporation established under a Central, State or provincial Act.
What is the maximum limit of deduction under section-80GGB??
- There is no prescribed limit of deduction under section-80GGB of the Income Tax Act. Therefore, An Indian Company can claim deduction of any amount contributed to political parties or electoral trusts.
- Donations made to political parties or electoral trusts are 100% tax deductible.
- However, Section-182 of the Companies Act provides that a company other than Government Company or a company which has been in existence for less than three financial years can contribute/donate directly or indirectly to any political party. Therefore, an Indian company with existence of less than three financial years cannot contribute to a political party in direct or indirect manner.
- Earlier, section-182 of Companies Act, 2013 provided for capping on the quantum of donation by a company. However, the capping as now been removed as such, companies can contribute any amount to political parties or electoral trusts without any restrictions.
- It is to be noted that deduction allowable under section-80GGB cannot be more than total taxable income of the assessee.
Other conditions for deduction under section-80GGB
- Deduction under section-80GGB is allowed only on payment basis. Therefore, to claim deduction under section-80GGB, you will have to make contribution/donation on or before 31st March of that financial year.
- Contribution in cash are not allowed under section-80GGB.
- The companies will be eligible to claim deduction under section-80GGB only where the contribution/donation has been made through banking channel such as cheque, demand draft or electronic transfer namely NEFT, RTGS, IMPS etc.
The benefit of section-80GGB is available only to an Indian Company. Other assessees are not eligible for deduction under section-80GGB. However, the similar benefit is also allowed to other assessees under section-80GGC of the Income Tax Act, 1961 which we are discussing as below:-
Section-80GGC states as below:-
"In computing the total income of an assessee, being any person, except local authority and every artificial juridical person wholly or partly funded by the Government, there shall be deducted any amount of contribution made by him, in the previous year, to a political party or an electoral trust.
Provided that no deduction shall be allowed under this section in respect of any sum contributed by way of cash."
On the basis of reading of the above provision, following questions arises in relation to section-80GGC as regards applicability and eligibility of this section on various classes of taxpayers:-
Who is eligible to claim deduction under section-80GGC??
- Any person other than local authority or artificial juridical person funded by Government can claim deduction under section-80GGC. Thus, an individual, HUF, partnership firm or LLP etc. can take benefit of section-80GGC.
- Since Indian companies can claim deduction of similar amount under section-80GGB, they are not entitled to claim deduction under section-80GGC.
What is the maximum limit of deduction under section-80GGC??
- There is no prescribed limit of allowable deduction under section-80GGC. Therefore, you can claim any amount of deduction for donations/contributions made to political parties or electoral trusts under section-80GGC.
- Donations made to a political party or electoral trust is 100% tax deductible.
- It is to be noted that deduction allowable under this section cannot exceed the total taxable income of the assessee.
Other conditions for deduction under section-80GGC
- Deduction under section-80GGC is allowed only on payment basis. Therefore, to claim deduction under this section, you must make a contribution to political party on or before 31st March of that financial year.
- Contribution in cash are not allowed under section-80GGC.
- So, you must ensure that contribution/donation to political parties/electoral trusts are made through banking channel namely cheque, demand draft, RTGS, NEFT, IMPS etc.
General points for Section-80GGB and 80GGC:
- You must obtain a valid receipt from the political party/ electoral trust for amount donated by you. Such receipt must contain the name of the political party, PAN and address, registration number of party, name of donor, amount donated, mode of donation (cash/NEFT/Cheque etc.)
- Details of donation made should be filled in the appropriate columns of ITR form.
Owing to Covid-19 Pandemic, the Government has extended the timeline for making contribution/donation for the purpose of claiming deduction under section-80GGB and 80GGC. Now, in respect of financial year 2019-20, you can make contribution/donation up to 31st July, 2020 to any political party or electoral trust.
