Section 80GGB of Income Tax Act

Section 80GGB of the Income Tax Act allows Indian companies to claim tax deductions on donations made to registered political parties or electoral trusts. As the world's largest democracy, India relies on political parties to represent citizens and support the country's development. To carry out activities such as election campaigns, public outreach, and day-to-day operations, political parties require financial support. To encourage corporate contributions through transparent channels, Section 80GGB was introduced under the Income Tax Act, 1961. The deduction available under this section helps reduce a company's taxable income, which can lower its overall tax liability.

If you run a business through a registered domestic company in India, understanding the provisions of Section 80GGB can help you make informed financial and tax planning decisions. By knowing the eligibility conditions and deduction rules, you can claim the available tax benefits on qualifying donations. This guide explains the key features of Section 80GGB and how companies can avail themselves of the deduction.

Key takeaways

• Indian-registered companies can claim a 100% tax deduction on donations made to registered political parties or electoral trusts.
• Contributions must be made via cheques, demand drafts, or electronic transfers; cash donations are not eligible.
• There is no upper limit on the amount that can be donated and claimed as a deduction.
• Proper records, including receipts with relevant details, are mandatory to claim the deduction.
• Donations must be made to political parties registered under Section 29A of the Representation of the People Act, 1951, or electoral trusts registered under Section 8 of the Companies Act, 2013.
• Government agencies and companies operating for less than three years cannot claim deductions.

What is section 80GGB of the Income Tax Act?

Section 80GGB of the Income Tax Act, 1961 allows Indian companies to claim a tax deduction for donations made to political parties or electoral trusts. For example, if a company earns Rs. 10 crore and donates Rs. 1 crore to a political party, the full donation amount can be deducted from its taxable income. As a result, tax will be payable on Rs. 9 crore. However, donations made in cash do not qualify for this deduction. The contribution must be made through banking channels.

The Income Tax Act does not specify a donation limit. However, the Companies Act, 2013 restricts political contributions to 7.5% of a company's average net profits.

Note: An Electoral Trust is a non-profit organisation registered under Section 8 of the Companies Act, 2013. It collects donations from individuals and companies and distributes them to eligible political parties.

Also read: Section 89 of Income Tax Act

Who is eligible to claim deductions under section 80GGB?

All Indian companies registered In India are eligible to claim the amount they donate to an electoral trust or political party without any threshold limit. The main aim of Indian companies donating an amount is to avail themselves of a tax deduction and lower their taxable income to pay lower taxes. However, there are some exemptions to the provisions of section 80GGB of the Income Tax Act. The following entities are not liable to claim a tax deduction on the amount they donate to an electoral trust or political party:

• Government agencies are disallowed to claim a tax deduction on the donated amount.
• Indian companies that have been operating for less than three years are ineligible to claim the deduction under section 80GGB.
• If any Indian company makes cash donations to an electoral bond or political party, it is eligible for a deduction. Eligible donations for tax deductions must be made through bank cheques, demand drafts, or electronic means using bank accounts.
• The donations made to political parties not registered under section 29A of the Representation of the People Act 1951 and electoral trusts not registered under section 8 of the Companies Act 2013 are ineligible for a tax deduction.

Also read: Income tax slab

What expenses are covered under section 80GGB?

Under section 80GGB of the Income Tax Act, the entire amount donated by Indian companies to electoral trusts and political parties is eligible for a tax deduction. Below are the expenses covered under the provisions of section 80GGB of the Income Tax Act:

• The entire amount donated by registered Indian companies to a political party registered under section 29A of the Representation of the People Act 1951.
• The political party must also be registered with the Election Commission of India and must comply with all the rules listed by the department.
• The entire amount donated by registered Indian companies to an electoral trust operating as a non-profit organisation was established under section 8 of the Companies Act 2013.
• The electoral trust must be registered with the Central Board of Direct Taxes and must comply with all its rules and regulations.
• Contributions must be made through listed payment modes, such as cheques, drafts, or electronic transfers.
• Expenses in the form of donations must be claimed through proper receipts and records issued by the political party or electoral trust. It must contain all the relevant information.

What documents are required to claim deductions under section 80GGB?

Here are the documents required to claim a tax deduction under section 80GGB of the Income Tax Act:

• Name as per government-issued ID
• Registered address
• Permanent Account Number (PAN)
• Collection account number or tax deduction of the recipient
• Registration number of the electoral trust or political party
• The mode of payment
• The amount of donation

The receipt issued by the electoral trust or the political party must include all the above details to be eligible for claiming a tax deduction.

Also read: Section 56 of Income Tax Act

Tax Deductions under Section 80GGB

Under Section 80GGB of the Income Tax Act, 1961, Indian companies or enterprises donating to a registered political party or electoral trust in India can claim a deduction for the contribution made. The political party must be registered under Section 29A of the Representation of the People Act, 1951. An electoral trust, formed as a non-profit under Section 8 of the Companies Act, 2013, is authorised to receive voluntary contributions from companies and distribute them to eligible political parties. This provision encourages transparency in political funding while allowing companies to reduce their taxable income through eligible political contributions.

Amount of deduction under section 80GGB

The deduction amount eligible under section 80GGB of the Income Tax Act is 100% of the donation amount. There is no cap on the maximum limit of deduction Indian companies can claim on the amount they donate to electoral trusts or political parties.

For example, company XYZ donated Rs. 5 lakh to a registered political party by issuing a cheque. Under section 80GGB of the Income Tax Act, this donation qualifies for a 100% deduction as the payment was made through a cheque. Company XYZ can claim a tax deduction of Rs. 5 lakh and reduce its taxable income by the full Rs. 5 lakh, leading to a significant reduction in its tax liability for the financial year.

Section 80GGB deduction limit

• There is no cap on the deduction amount under Section 80GGB. Eligible companies can claim a 100% tax deduction for any donation made to a political party registered under Section 29A of the Representation of the People Act, 1951, as amended by the Finance Act, 2017.
• As per Section 182 of the Companies Act, 2013, companies are not obligated to disclose the name of the political party they contributed to. Contributions can also include indirect support such as TV advertisements, radio jingles, or sponsored social media campaigns for a political party.
• All qualifying corporate donations are fully tax-deductible under Section 80GGB of the Income Tax Act, offering companies both political engagement and tax benefits.

Conditions to claim section 80GGB deductions

Here are the conditions to claim a tax deduction on the donated amount under section 80GGB of the Income Tax Act:

• Eligible donor: Only Indian companies are eligible to claim the tax deduction. Under this section, individuals and HUFs are ineligible.
• Registered political parties: The donation must be made to a political party registered with the Election Commission of India and under section 29A of the Representation of the People Act 1951.
• Registered electoral trust: The donation must be made to a political party registered with the Central Board of Direct Taxes and under section 8 of the Companies Act 2013.
• Mode of payment: The donation must be made via cheque, draft, or electronic transfer. Cash payments are not eligible.
• Documents: The company claiming the deduction must obtain a receipt to support the claim, including the details of the donation.
• Payment Timing: The donation should be made within the financial year for which the deduction is claimed.

Also read: Income Tax Return Extended Date for FY 2024-25

How to claim Section 80GGB deduction

1. Ensure the donation is made to an eligible political party or trust

The company must confirm that the donation is made to a political party registered under Section 29A of the Representation of the People Act, 1951, or to an approved electoral trust.

1. Maintain proper records

Keep a receipt issued by the political party or electoral trust. The receipt should clearly mention the recipient's name, PAN, payment method, donation amount, and transaction reference details.

1. Disclose the donation in financial statements

Companies should report political donations in their Profit and Loss Account and annual reports, as required under applicable corporate governance rules.

1. Claim the deduction while filing income tax returns

When filing ITR-6, companies must report the donation under Section 80GGB and retain the required supporting documents to claim the deduction.

What you should know about contributions to political parties in India

If your organisation plans to contribute to the finances of an Indian political party, it’s essential to understand the provisions of Section 80GGB under the Income Tax Act of 1961. Here’s what you need to know:

1. Eligibility to Donate: Any Indian-registered company or business can donate to a political party, provided the party is registered under Section 29A of the Representation of the People Act, 1951. Contributions can be made to multiple political parties, and the total amount donated will be considered for tax deduction under Section 80GGB.
2. Criteria for Electoral Trusts: If donations are made through an electoral trust, the trust must be registered and recognised by the relevant authorities.
3. Permissible Modes of Payment: Donations in cash are strictly prohibited under Section 80GGB. Contributions must be made via demand drafts, electronic transfers, pay orders, or cheques to the political party's bank accounts. This ensures transparency in the flow of funds and maintains fair practices in political financing.
4. Tax Deduction Benefits: Your organisation can claim a 100% income tax deduction on the amount donated to political parties under this section. This means contributions are fully deductible, reducing your taxable income accordingly.
5. Compliance and Record-Keeping: To claim the deduction, adhere strictly to the rules outlined in the Income Tax Act of 1961. Maintain accurate records of all donations, including payment details. Failure to comply with these regulations may result in the rejection of your deduction claim by the tax authorities.

Conclusion

Section 80GGB of the Income Tax Act is a section that provides guidelines for Indian companies to claim a tax deduction on the amount they donate to electoral trusts and political parties. As there is no cap on the amount they can donate and claim as deductions, Indian companies can significantly lower their taxable income through the donation. However, it is important that the donation must be made to registered electoral trusts and political parties through the listed mode of payment and not in cash.

If you are considering investing in mutual funds, look no further than the Bajaj Broking website. It is designed with unique investing tools, such as a mutual fund calculator that can help you compare mutual funds and invest in the most suitable mutual fund schemes.

Essential tools for all mutual fund investors