Political Donations: Income Tax Dept. Probes Taxpayers who Availed S.80GGC Deduction for FY 21 & 22
Recent reports suggest that a number of taxpayers have received notice from the Income Tax Department seeking specific details of the deductions claimed by virtue of donations to political parties.
Reports from different corners of the nation point towards an extensive investigation launched by the Income Tax Department to probe into taxpayers who claimed deductions under Section 80GGC of the Income Tax Act, 1961, for donations made to political parties and electoral trusts during the financial years (F.Y.) 2020-21 and 2021-22. The notices have been issued primarily to taxpayers who...
Reports from different corners of the nation point towards an extensive investigation launched by the Income Tax Department to probe into taxpayers who claimed deductions under Section 80GGC of the Income Tax Act, 1961, for donations made to political parties and electoral trusts during the financial years (F.Y.) 2020-21 and 2021-22.
The notices have been issued primarily to taxpayers who had availed deductions under Section 80GGC of the Income Tax Act, 1961 citing donations made to lesser-known or unregistered political parties, suggesting concerns of tax evasion and potential money laundering being conducted under the veil of political donations.
Read More: Income Tax Dept. Sends Messages to Taxpayers Who Claimed Donations to Political Parties u/s 80GGC
Sources within the tax department reveal that around 5,000 notices have been dispatched so far, with more expected in the coming weeks. The matter came under the radar of the Department when some taxpayers claimed that they donated up to 80% of their income to unrecognized political outfits. These entities, though registered under the Representation of the People Act, 1951, have not contested elections or met the necessary vote percentage criteria for formal recognition.
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The Crackdown: What’s Happening?
A recent tweet by CA Himank Singla has sparked widespread discussion, where he shared an image of a tax notice sent to a taxpayer regarding their Section 80GGC claim. The tweet quickly gained traction, prompting responses from tax professionals and general taxpayers alike.
While some X users expressed concerns over excessive scrutiny and bureaucratic harassment, many endorsed the department’s mechanism, citing the need for stricter electoral funding regulations.
Several prominent CAs replied to Singla’s post, highlighting that genuine donors have nothing to fear as long as they maintain proper documentation. Others pointed out that the warning messages sent by the IT department serve as a preemptive measure, urging taxpayers to rectify errors by filing updated ITRs (ITR-U) before March 31, 2025, for assessment years 2022-23 and 2023-24.
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What does Section 80GGC Permit?
Section 80GGC allows 100% tax deductions for contributions to political parties or electoral trusts, provided they are made via legal banking channels such as net banking, credit cards, or cheques. Donors making cash donations are not eligible to avail the deductions through Section 80GGC.
The intent of the provision was to enhance transparency in political funding and reduce financial opacity in elections, calling for such donations to be made channels that can be tracked by the Authorities without much delay.
The Central Board of Direct Taxes (CBDT) had previously tightened compliance norms in 2022 by modifying ITR-7 forms, which political parties must file. Additionally, individuals with incomes exceeding ₹50 lakh are now required to disclose detailed information on their contributions to political parties.
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What Information do the Notices Seek?
Taxpayers are required to provide comprehensive financial records to substantiate their claims, including details about their nature of business or profession, which helps the authorities assess whether the claimed deductions align with their declared income sources.
Additionally, bank account statements for all accounts for FY 2020-21 have been called to be submitted, along with details of taxpayers’ sources of income for FY 2019-20, 2020-21, and 2021-22 complete, with audited financial statements for these years. These documents will help determine whether the taxpayer had sufficient taxable income to justify the donation amounts claimed under Section 80GGC.
One of the key matters to be verified by the taxpayers is that no part of the donation has been claimed under any other tax benefit or deduction. Authorities require the name and registration details of the recipient political party or electoral trust, along with a copy of its registration certificate.
The move has been formulated to ensure that donations were made only to eligible entities recognized under tax and electoral laws and not sham entities.
Additional Information for Donations Made in FY 2020-21
The notices reportedly require taxpayers to provide specific details regarding their political donations made in FY 2020-21. This includes the PAN of the political party or electoral trust, information on how they came into contact with the recipient entity, and the name of the contact person associated with the political party or trust.
Additionally, taxpayers must disclose whether they conducted any due diligence before making the donation and confirm whether the political party actively contests elections in their constituency.
Supporting Documents called For
- Proof of mode of payment (bank transaction, cheque, online transfer, etc.).
- Donation receipts issued by the recipient party/trust.
- Declaration from the political party/electoral trust confirming compliance with Income Tax Act, 1961.
- Confirmation of whether the recipient political party is registered under Section 29A of the Representation of the People Act, 1951, or an electoral trust approved by the CBDT, along with proof of registration.
- Details of the source of income from which the donation was made.
Statutory Provisions
Various statutory provisions, including the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Black Money Act) and the Income Tax Act, 1961, along with electoral laws, have been enacted to regulate and enhance transparency in political donations.
Besides Section 80GGC, Section 13A of the Income Tax Act, 1961 grants tax exemptions to political parties on income from voluntary contributions, provided they maintain proper books of accounts, list all donations above ₹20,000, and file annual returns.
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Section 29C of the Representation of the People Act, 1951 requires political parties to disclose donations above ₹20,000 to the Election Commission. However, this has been misused, as many parties report multiple smaller donations below ₹20,000 to avoid scrutiny.
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Implications for Taxpayers
The current investigation underscores the importance of adhering to tax laws while making political donations.
If taxpayers’ claims on donations to political parties are found to be fraudulent, they could be slammed with severe penalties, interest, and even legal repercussions. Those who have made genuine donations must ensure they possess valid receipts, bank transaction records, and the necessary confirmations from recipient political parties.
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