Section 80GGB of Income Tax Act

Section 80GGB of the Income Tax Act deals with providing tax deductions to Indian companies on the amount they donate to electoral trusts or Indian political parties. India is the largest democracy in the world and offers the utmost flexibility and choice to Indian citizens to vote and choose the political party that will manage the country and ensure the carrying out of developmental activities. However, every political party in India needs funds for activities such as election campaigns or to manage its operations on a large scale. Hence, section 80GGB was introduced in the Income Tax Act 1961 to encourage Indian companies to donate to electoral trusts or political parties. The tax deductions eligible under the provisions of section 80GGB of the Income Tax Act result in lowering the taxable income of Indian companies, who end up paying a lower amount as income tax.

If you operate a business in India and have a domestic registered company, it is important to know the provisions of section 80GGB of the Income Tax Act as it can allow you to save a hefty amount of tax. This blog will help you understand all you need to know about section 80GGB of the Income Tax Act to ensure you can avail of a tax deduction for eligible donations.

What is section 80GGB of the Income Tax Act?

Section 80GGB of the Income Tax Act is a section included in the Income Tax Act 1961 that allows Indian companies that donate money to electoral trusts or Indian political parties to claim the donated amount as a tax deduction. Donations made by registered Indian companies to a political party registered under section 29A of the Representation of the People Act 1951 are eligible for a tax deduction. On the other hand, Indian companies must make donations to electoral trusts operating as non-profit organisations, which are established under section 8 of the Companies Act 2013.

Electoral trusts are entities set up to manage and distribute political donations transparently. Indian companies can voluntarily donate to an electoral trust which distributes the donated amount to Indian political parties. Such a donation can also be claimed by Indian companies as a tax deduction under section 80GGB of the Income Tax Act. There is no upper limit or threshold limit for the amount that can be claimed as a tax deduction by Indian companies in this case. Hence, whatever amount is donated can be claimed as a tax deduction, which lowers the company's taxable income by the donated amount.

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

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.

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

Key points related to contributions made to political parties in India

Here are the key points related to contributions made to political parties in India:

• Any company registered in India with the Election Commission of India and under section 29A of the Representation of the People Act 1951 is allowed to donate as much amount as they want to Indian political parties in a given financial year.

• The amount donated by such companies to Indian political parties is allowed 100% to be claimed as a tax deduction. However, the political party must be registered under section 29A of the Representation of the People Act 1951 and with the Election Commission of India.

• Cash donations are not allowed to be claimed as a deduction under section 80GGB of the Income Tax Act. The donation must be made through accepted payment modes such as cheques, drafts, or electronic transfers.

Also read: 234B of Income Tax Act

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.

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