Taxman sends tough questions to individuals on political donations

Mumbai: Who contacted you from the political party? Name the person. Did the party contest in your constituency? Did you carry out any due diligence before contributing? How did you come in contact with the electoral trust? These are among a long list of questions that the income tax (I-T) department has sent to thousands of individuals who had donated ₹5 lakh or more to little known political parties.

The detailed queries, pertaining to financial year 2020-21, have been sparked by the suspicion and subsequent intelligence inputs that many donors gave cheques only to get back the money in cash from the party, serving as a laundering machine and collecting 1-3% as commission for the 'service'.

Donors can claim full deduction of the amounts donated, thereby lowering their taxable incomes. Under the law, there is no cap on the amount that can be donated to a political party to escape tax.


More than 9,000 persons have claimed under section 80GGC on their donations of ₹5 lakh or more during the year under review. Section 80GGC applies to individuals while section 80GGB of the I-T Act relates to companies making similar donations.

"If the taxpayer is unable to justify the claim of donation, then it could invite heavy tax and penal consequences since apart from denial of deduction, tax authorities could also make simultaneous income addition on the presumption of undisclosed cash receipts from 'registered unrecognised political parties'. The eligible taxpayers may consider suo moto filing updated tax return to minimise the consequences," said Ashish Karundia, founder, Ashish Karundia & Co.

The recipients of the notices, which were served over the past few weeks, have been told to share details of their nature of business or profession, account statements of all bank accounts for FY21, sources of income and audited financial statements for 2019-20, 2020-21 and 2021-22, name, permanent account number and registration certificates of the political parties and electoral trusts.

"The department is scrutinising a large number of donations to the political parties. All they want is to check whether these donations are genuine. People who made genuine contributions don't have to worry. But, for others, it is high time to update the return and withdraw the deduction and pay tax with interest before March 2025," said Rajesh P. Shah, partner at Jayantilal Thakkar & Company.

The information of donors who contributed to parties which did not field candidates in respective constituencies of the donors could serve as evidence for the department to question the rationale of deduction under section 80GGC. Donors identified by the tax department have to also disclose political contributions made during other years besides 2020-21.