Section 80GGB Deduction
Any individual or company has the right to favour or support a political party either due to the ideologies they stand by or just to express solidarity with the party. Another major reason for supporting a political party is to avail tax deduction under Section 80GGB and Section 80GGC. These 2 sections of the Income Tax Act provide a tax benefit to the taxpayer through deductions for their political contribution.
Section 80GGB provides an exemption for Indian companies from tax for their contribution or donation towards any registered political party or an electoral trust. There is no limit to the amount of contribution under this section, and hence any amount can be claimed. In a way, this encourages contribution to political parties to further their agenda towards public welfare.
The party receiving the donation must be registered as per Section 29A of Representation of People Act 1951. An electoral trust is a non-profit organization established under Section 8 of the Companies Act 2013. An Electoral trust has the right to receive voluntary contributions from various companies and re-allocate to the political parties that are duly registered.
Contributions under Section 80GGB
The following are the contributions are permitted to be claimed for tax deduction under Section 80GGB by companies:
- A company gives any donation, subscription or payment on its account, or its behalf by someone else to a person who is a part of any activity that affects or is likely to affect support for a political party or a purpose
- The total amount of expenses that may directly or indirectly be incurred by an organization or an advertisement in a publication such as a magazine, brochure, or pamphlet that is published on behalf of any registered political party. This publication may not be directly connected to the political party but works for the advantage of the party through contribution towards a political purpose
- A political donation includes expenditure in the realm of advertising, social media campaigns, radio jingles, television commercials administered by the political parties
A political party is a party that is registered as per Section 29A of Representation of People Act 1951.
But it is important to note that none of the above contributions must be in cash, and the company must have proof of the donations made.
Registration of Political Parties under Section 29A
The rules and regulations of the provisions of Section 29A of Representation of People’s Act 1951 have guidelines about registration of political parties. A political party that wishes to be registered under this section should get in touch with the commission and will need to apply for registration within 30 days post the date of formation of the party. The guidelines for registration are laid down by the Election Commission of India.
The guidelines are a part of those conferred by the Representation of the People's Act 1951 and Article 324 of the Commission of India. The applying party must furnish the proposed party name in 2 daily and national newspapers for 2 days in a row to check if there are any objections to the name.
Eligibility Criteria to Claim Deduction under Section 80GGB
Given below are the eligibility requirements for a company to claim donation to political parties for tax deduction under Section 80GGB:
- Under this section, while computing the total income of a taxpayer, an Indian company, there will be a deduction of any sum donated by it to a registered political party or an electoral trust
- Indian companies that are registered under the Companies Act 1913 are permitted to claim the 80GGB deduction. The following entities cannot claim the deduction:
- A government company
- A company that has been established only in the last 3 years
- Donations must not be in cash to be eligible for tax claims under Section 80GGB. All contributions must be made via DD, Cheque, NEFT or RTGS only as these go through bank and audit trail
- Although there is no upper limit on the donations, the amount should not exceed 7.5% of the average net profits in the previous 3 years. The company must disclose the name of the recipient and its contribution to its financial statements. But if the company does not wish to disclose the name of the recipient and donation amount, it can contribute electoral bonds
- Donations must only be made to political parties registered as per Section 29A of Representation of People Act, 1951
- Donations given to electoral trusts are also eligible for tax deduction.
- Advertisements given by companies on various platforms owned by political parties are also eligible for deduction.
Procedure to Avail Tax Deduction under Section 80GGB
The procedure to avail tax deduction by companies is as given below:
- No cash donations are allowed to be claimed.
- Modes of payment can be only via cheque, Demand Draft, or Electronic transfer
- The amount of contribution for deduction eligibility does not have an upper limit except that according to Companies Act, 2013, 7.5% of the yearly net profit of the company can be contributed
- The company must disclose the contribution amount and the name of the political party in the yearly Profit and Loss account for the particular financial year
- If the donation amount is made through electoral bonds, the name of the party need not necessarily appear in the Profit and Loss Account of the company. Only the contribution amount needs to appear
- Advertisement via print and social media is eligible for tax deduction under Section 80GGB
- The company must maintain a record of its contributions for future reference.
- A Public sector enterprise or a company with an age of 3 years or lower cannot claim deduction.
Steps to Claim 80GGB Tax Deductions:
The contributions and donations made to registered political parties are completely exempted from the total income of the company, which is the donor. But the donor company cannot claim tax deductions greater and above his taxable income. Below are the steps in computing and claiming tax deductions:
- Calculate the total income of the company
- Compute the total amount of contribution made by the company towards the political parties and electoral trusts for the financial year
- Reduce the total contributed amount by the company from its total income calculated. The resulting figure will be the taxable income upon which the company must pay tax
Contribution and Deduction Limit for Section 80GGB
There is no higher limit for claiming tax deduction under Section 80GGB. Any donation to a registered political party, registered under section 29A by a certified company can be claimed for tax exemption.
Income Tax Act 1961 does not carry any provisions to limit political contributions by companies. Still, Companies Act 2013 limits the contribution of companies’ up to 7.5% of their average net profits of the previous 3 years.
Also, section 182 makes it mandatory for companies to disclose the contributions in their profit and loss statements with the name of the political party.
Difference between Section 80GGB and Section 80GGC
Section 80GGC of the Income Tax Act 1961 also offers a tax deduction on contribution to political parties. But under this section, the deduction is restricted to donations made to political parties by individuals only and not companies. Like Section 80GGB, is no upper limit for contribution amount for section 80GGC as well. Any contribution to a single or even multiple political parties can be claimed as tax deduction under Section 80GGC.
Both sections 80GGB and 80GGC provide tax exemptions on political donations. The only difference is that companies can claim tax rebates under Section 80GGB. Under section 80GGC, individuals shall claim benefits on tax for their contributions. HUF’s are not eligible to claim benefit on tax under section 80GGC.
Points to Remember while Claiming Deduction under Section 80GGB
- Any Indian company can donate to a political party they wish to support
- Any company can claim a 100% deduction under Section 80GGB for the amount contributed to a political party.
- Any individual can take the donation on behalf of a political party except those funded by the government, artificial juridical person, or belonging to a local authority
- While implementing the provisions of Section 80GGB of the Income-tax Act, the following pointers must be kept in mind
- Any cash contributions are strictly prohibited for tax claims.
- IF any electoral trust is receiving the donation, its authenticity must be verified through its registration and recognition documents
- An eligible company can contribute to any number of electoral trusts or political parties
- Even though Section 80GGB does not have any restrictions on the number of donations eligible for a tax deduction, certain restrictions are levied by the Companies Act 2013. Indian companies can contribute only up to 7.5% of their net earnings of 3 previous financial years
- The companies who made donations are supposed to disclose their contributions in their profit and loss statement with the name of the political party registered under section 182 of the Companies Act 2013
- If the donation is made through electoral bonds, the name of the political party need not be disclosed
A company is free to make donations to political parties of their choice and preference to claim benefits on tax. But they must take care to keep a record and comply with all the rules and regulations of the Income Tax Act 1961. If these procedures are not followed, the deduction claim may be rejected by the Income Tax department.
Ans: Electoral Trust is a non-profit organization created for collecting voluntary contributions from individuals and companies. This fund is then distributed to political parties who need them. The electoral trust is used as a medium to donate for companies who do not wish to reveal their identity.
Ans: Any donation made by a registered company to a registered political party is fully exempted from tax under Section 80GGB of the Income Tax Act.
Ans: According to Section 293A of Companies Act, no government company contributes any amount either directly or indirectly to a political party or for any political purpose.
Under sections 3 and 4 of the foreign contributions Act, political parties cannot accept contributions from foreign companies or Indian companies controlled by foreign agencies.
Ans: Persons who wish to donate to political parties can do so using demand draft, cheque, or internet banking. Mostly, political parties have set up online platforms for donations to ease payment of funds. Cash payment is not allowed.
Ans: No. Contributions made in kind are not eligible for deduction under Section 80GGB.
Ans: There is no cap on the claim amount for Section 80G, but there is a limit on deductions overall. IT must not exceed the gross income of the taxpayer.
Ans: The Income-tax Act does not limit the amount of contribution made by companies. However, the Companies Act 2013 limits the amount of contribution to 7.5% of average net profits for the last 3 years.
Ans: Donations under Section 80G are divided into 2 categories – maximum and minimum limit. They have further sub-categories. The amount that exceeds the maximum limit will enjoy a tax deduction of 50% or 100% based on the category they belong to.
Ans: Section 29B of the Representation of People's Act says that every political party can accept all amounts of contribution given voluntarily by an individual or a company other than a government company or a foreign source.
Ans: According to Section 13A of the IT Act, any income of political party which is charged under the heading, "Income from house property" or "Income from other sources" or any way of voluntary contributions received by a political party from an individual cannot be included in the total income of the previous year of the party.
Ans: According to Section 29C of the Representation of People's Act, the treasurer of a political party or a person authorized by a political party on his behalf must, in each financial year, prepare a report stating the contribution more than Rs. 20,000 received by the political party from any individual in that financial year.
Q: What exemptions are enjoyed by the donors who can give voluntary contributions to political parties?Ans: Any contribution to political parties by an individual is fully deductible from income tax under section 80GGC and Section 80GGB if the donation is made by a registered company.
Ans: One must submit his name, PAN number, address donation amount, and the Income Tax Return (ITR) to claim the deduction amount. To complete the claim, one must submit a stamped receipt from a charitable fund or organization.
Ans: The following contributions have no maximum limit and allow 100% tax deduction:
- Prime Ministers National Relief fund
- Swachh Bharat Kosh
- National Illness Assistance Fund
- National Children’s Fund
- Clean Ganga Fund
- National Defence Fund set up by the Central Government
Ans: According to Section 293A of Companies Act 1956, no company that has been around for less than 3 financial years can contribute directly or indirectly any amount to a political party or for a political purpose.
The Act also states that the company incorporated under the Companies Act can donate up to 5% of its profit each year, and it must disclose the amount in its profit and loss account. This process must be conducted after the approval of its board of directors through a resolution. If a company fails to abide by the laws of this section, it shall be punishable by a fine which may extend upto 3 times the amount of contribution. The company donating must disclose the details of the donation made in their profit and loss account, which must be verified by the ministry of corporate affairs.
Ans: Gross income is computed by adding the total earnings minus the following amounts:
- Income that is exempt from tax
- Income under Sections 115A, 115B, 115D and 115AD related to non-resident and foreign companies
- All deductions under Section 80CCC to 80U excluding Section 80G
- Long-term Capital gains