Electoral Trust and its Exemption and Deduction under Income Tax Act, 1961

Political Parties and Election Campaigns are an essential aspect of the Indian democratic system, and to encourage larger contributions to political parties, Section 80 GGB of the Income Tax Act, 1961, provides an exemption from taxation. This provision primarily addresses donations and contributions made by Indian companies to political parties or electoral trusts. In this article, we’ll discuss Electoral Trust and its Exemption and Deduction under Income Tax Act, 1961.

Before we move ahead, it is important to understand some terminologies in relation with electoral trust and its exemption and deductions.

What do we mean by Electoral Trust?

Electoral Trust is a form of a company established under Section 8 of the Companies Act, 2013 or a non-profit organization established in India for the orderly receipt of voluntary contributions from any person and the distribution of the same to the respective political parties registered under Section 29A of the Representation of the People Act, 1951.

Objectives and Functioning of the Electoral Trust

The following are the Objectives and Functioning of the Electoral Trust:

• Objective: The Electoral Trust’s goal is not to make a profit or to provide any direct or indirect advantage to its members or contributions. Its main purpose is to disburse the funds it receives to the political party in question. This is a system for increasing openness and sanity in political party fundraising. Companies can avoid the dislikes of any political party to which they have not paid by channelling political money through an electoral trust.

• Functioning: The Electoral Trust may gather contributions from Indian people and domestic companies established in India, as well as from a firm or Hindu Undivided Family or an Association of persons or a body of individuals residing in India. The electoral trust cannot accept any donation without the contributor’s Permanent Account Number (PAN) if he or she is a resident and the passport number if the contributor is an Indian citizen who is not a resident. The electoral trust may not take donations from non-citizens, other electoral trusts, or government enterprises, or from any other foreign source or institution, whether incorporated or not. They are unable to accept cash contributions. An electoral trust is under obligation to disburse at least 95 percent of the total contributions collected during the fiscal year, as well as the surplus left over from the previous fiscal year, to qualifying political parties by March 31st of the following fiscal year. The donations cannot be used to benefit the Electoral Trust’s own members or contributors, either directly or indirectly.

Exemption to Political Parties and Electoral Trust as per Income Tax Act, 1961

Section 13A exempts political parties from paying income tax on their income from home property, voluntary contributions, income from other sources, and capital gains.

However, it is subject to the following requirements being satisfied:

• Keeping records and accounts to allow Assessing Officer (AO) to calculate its income.
• Hire a Chartered Accountant to audit your books.
• Keep records of any contributions exceeding Rs. 20,000.
• Provide the electoral commission with a report of donations in excess of Rs. 20000 before the return filing deadline.
• Should not accept financial donations in excess of Rs. 2000.

 Similarly, any voluntary donations received by an Electoral Trust are exempt under Section 13B of the Income Tax Act, 1961 if the following conditions apply:

• If the Trust provides to political parties registered under Section 29A of the People’s Representation Act, 1951, 95 percent of the total donations collected and any previous year excess.
• If it operates in conformity with rules established by the Central Government.

Deduction to Political Parties and Electoral Trust as per Income Tax Act, 1961

According to Section 80GGB of the Income Tax Act, 1961, any Indian company or enterprise that gives to a registered political party or electoral trust in India may claim a deduction for the amount of money paid. Section 29A of the Representation of the People Act, 1951 requires the political party receiving the gift to be registered. An electoral trust is a non-profit trust established pursuant to Section 8 of the Companies Act, 2013. An electoral trust can accept voluntary donations from other businesses and redistribute them to officially registered political parties.

Claim for Deduction under Section 80GGB by Electoral Trust

Section 80GGB provides the procedures and circumstances for donating to political parties in India. The following are the most important aspects to remember:

• Section 80 GGB prohibits cash contributions. As a result, contributions to political parties must be done in other ways, such as by check, demand draught, or electronic transfer.
• Under Section 80 GGB of the Income Tax Act, there is no maximum applicable restriction on contributions paid to political parties. However, under the Companies Act, 2013, businesses can contribute up to 7.5 percent of their yearly net earnings (three years average).
• The company must state the amount contributed as well as the name of the political party in its Profit and Loss account for the fiscal year in question.
• If the funds were given through electoral bonds, there is no need to include the name of the party in the company’s profit and loss statement but the amount paid.
• According to the most recent guidelines, any advertisement by a company on a platform of which the political party is the owner is deemed to make a donation under Section 80 GGB. As a result, it qualifies for an income tax deduction. This covers social media, magazines, newspapers, and other publications.
• There is no limit to the amount that can be payable to a political party. However, a company must pay the amount through an appropriate channel and preserve a documentary record of it.
• Certain exclusions apply to contributions made under Section 80 GGB:

• A Public Sector Company
• A company that has been in operation for three years or fewer.

Key Points concerning Political Party Contributions

If your company is thinking about donating to a political party in India, you should know some points. The following are the main points to remember from the Income Tax Act, 1961:

• Any company or enterprise registered in India is free to contribute to any political party it chooses.
• A company may make contributions to as many political parties as it likes. For the purpose of calculating the income tax deduction, all contributions made under Section 80GGB will be aggregated.
• Section 29A of the Representation of the People Act, 1951 requires that the political party receiving the money must have registration.
• Furthermore, the electoral trust that receives the gift must have legal registration and recognition by the appropriate authorities.
• Section 80GGB does not permit monetary payments under any circumstances. Cheques demand draughts, electronic transfers and pay orders to the political party’s bank account are the only permissible ways of payment.
• Section 80GGB allows the company to deduct 100% of the money contributed to a political party. As a result, you are free to make donations to political parties and claim tax deductions for them.

If you do not follow the prescribed method, the appropriate authorities may reject your claim for deduction.

Takeaway

Section 80GGB prohibits cash donations in order to maintain transparency in political funding. It is due to keeping track of the money received and spent. Furthermore, it is critical that you keep a thorough record of the amount paid. And it is advisable, to follow all of the laws outlined in the Income Tax Act, 1961 otherwise the appropriate authorities may reject your claim for deduction.