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Income Tax Department Targets Questionable Political Donations: Key Insights for Donors

Income Tax Department Targets Questionable Political Donations: Key Insights for Donors

Under Income Tax, Section 80GGB ( Contributions given by companies to political parties) & Section 80GGC ( Contributions given by any person to political parties like Individuals etc.) covers deduction for contribution to Political Parties.

Recently, The Income Tax (I-T) Department is intensifying its scrutiny of individuals and entities claiming tax deductions on political donations. Donors who contributed to lesser-known political parties during FY 2020-21 are now facing increased examination. Here’s a comprehensive look at the investigation, its potential consequences, and essential steps taxpayers can take to safeguard themselves.

According to reports, about 9,000 people donated Rs 5 lakh or more in the financial year 2020-21 and claimed tax exemption under Section 80GGC in return.

 

Contents of the article:

  1. Scrutiny & Modus Operandi
  2. Notice & Key Questions from the I-T Department
  3. Scrutiny & Modus Operandi
  4. Potential Consequences for Donors
  5. How Donors Can Protect Themselves
  6. What steps should I take if I've made a political donation in the past
  7. How can I verify if a political party is registered and credible
  8. What kind of documentation do I need to keep for my political donations
  9. Warning

 

  1. Scrutiny & Modus Operandi

The I-T Department suspects a large-scale money laundering operation wherein donors allegedly convert black money into legitimate funds through political contributions. The scheme operates as follows:

  • Donors issue cheques to obscure political parties.
  • These parties return the amount in cash after deducting a commission of 1-3%.
  • Donors then claim tax deductions under Section 80GGC (for individuals) or Section 80GGB (for companies), effectively reducing their taxable income.

However, many recipient parties lacked credibility—some did not even contest elections in the donors’ constituencies, raising further suspicion.

  1. Notice & Key Questions from the I-T Department

The Income Tax Department has issued notices demanding detailed explanations from donors. The key questions include:

  • Who approached you from the political party? Provide the name of the person.
  • Did the party contest elections in your constituency?
  • What due diligence did you conduct before making the donation?
  • How did you establish contact with the electoral trust or political party?
  • Submit supporting documents, including:
    • Bank statements for FY 2020-21
    • Audited financials from 2019 to 2022
    • PAN and registration details of the recipient political party

These inquiries aim to verify the legitimacy of the claimed deductions and uncover potential misuse of political donations for tax evasion.

  1. Potential Consequences for Donors

Donors found guilty of misusing political donation deductions may face:

  • Rejection of Tax Deductions – The claimed deductions under Sections 80GGC and 80GGB may be disallowed.
  • Heavy Penalties & Income Adjustments – The donated amount could be treated as undisclosed income, leading to tax reassessments, penalties, and interest charges.

The I-T Department’s crackdown signals stricter enforcement, urging taxpayers to ensure transparency and due diligence in their political contributions.

  1. How Donors Can Protect Themselves

To avoid legal trouble and financial penalties, donors should take the following steps:

  • For Genuine Donors: Maintain all supporting documents, including acknowledgment receipts, the political party’s tax exemption certificate, and bank transaction records as proof of a legitimate donation.
  • For Doubtful Claims: Consider filing an Updated Income Tax Return (ITR-U) by March 2025 to voluntarily withdraw questionable deductions, pay the due taxes, and mitigate penalties.
  • Due Diligence: Before donating, verify whether the political party actually contested elections in your area. Donations to unrecognized parties with no electoral activity are red flags.

 

  1. What steps should I take if I've made a political donation in the past
  • Verify the Legitimacy of the Recipient Party
  • Registration Status: Ensure the political party is registered under relevant laws, such as Section 29A of the Representation of the People Act, 1951, in India.
  • Electoral Activity: Check if the party contested elections in your constituency or has any electoral activity.
  • Maintain Proper Documentation
  • Donation Receipts: Keep receipts issued by the recipient party or electoral trust, including details like the party's name, PAN, mode and amount of donation, date, and proof of payment.
  • Bank Statements: Ensure bank statements reflect the transaction.
  • Copies of Cheques or UPI Confirmations: Keep copies of these for record.
  • Review Tax Deductions
  • Section 80GGC: If you claimed deductions under Section 80GGC, ensure you have all necessary documents to substantiate your claim.
  • Compliance: If your donation was not genuine or lacks proper documentation, consider filing an Updated Tax Return to rectify discrepancies before March 31, 2025.
  1. How can I verify if a political party is registered and credible

 

  • Check Registration Status
  • Use the Political Parties Registration Tracking Management System (PPRTMS) by the Election Commission of India to check if a party is registered. You can track the status of applications and verify registered parties online.
  • Verify Electoral Activity
  • Check Election Participation: Ensure the party has contested elections in your constituency or has electoral activity. This can be done by reviewing past election results or contacting local election offices.
  • Public Presence: Look for the party's presence in public forums, debates, and media coverage.
  • Review Financial Transparency
  • Financial Reports: Check if the party publishes audited financial reports. In India, for example, registered unrecognized political parties (RUPPs) must submit financial and election expenditure reports.
  • Donation Transparency: Ensure the party discloses its donors and maintains transparency in its funding.
  1. What kind of documentation do I need to keep for my political donations

To maintain proper documentation for political donations, you should keep the following records:

  • Donation Receipts
  • Receipt Details: Ensure receipts include the name and address of the donor, the amount donated, and the date of donation.
  • Party Details: The receipt should also contain the name, registration number, and PAN of the political party or electoral trust.
  • Bank Statements
  • Transaction Records: Keep bank statements that reflect the transaction, including the date and amount of the donation.
  • Proof of Payment
  • Cheque Copies or UPI Confirmations: Maintain copies of cheques or UPI confirmations as proof of payment.
  • Tax Exemption Certificate
  • PAN of Political Party: Ensure the political party or electoral trust has a valid PAN, as this may be required for tax deductions.
  1. Warning:
    “If the donation isn’t genuine, taxpayers face a double hit—losing deductions and having the amount added as undisclosed income, consequently penalty upto 200% of Tax evaded along with interest.”

 

  1. This investigation may extend to subsequent years as well:

“This scrutiny isn’t limited to FY 2020-21; the I-T Department may extend investigations to other financial years as well.”