A Simplified Guide to Tax Deductions Under Section 80GGB

Section 80GGB of Income Tax Act, 1961 enables all Indian companies registered under the Companies Act of 2013 to claim tax deductions for donations that have been made to recognized political parties or electoral trusts. This section is designed to encourage companies to make more contributions by making these donations tax-exempt.

Through this comprehensive blog, let’s understand the basics about Section 80GGB of Income Tax Act, its eligibility criteria, exemptions, deductions, contributions and some rules and regulations that must be remembered for better applicability.

What is Section 80GGB?

Section 80GGB of Income Tax Act of 1961 allows Indian companies to claim tax deductions for donations they make to political parties or electoral trusts. For example, an Indian company donated 1 crore to a political party and has 10 crore overall income, then 100% of the contribution will be deducted from the income. As a result, the company will have to pay tax on the income of 9 crore. However, the contributions made in cash are not eligible for claiming this deduction. It must be made through bank transfer.

Although there is no limit of donation to political parties mentioned in the Income Tax Act, the Companies Act 2013 imposes a restriction on the companies to contribute up to 7.5% of their Annual Net Profit to political parties.

Note: An Electoral Trust is a non-profit organization established in India under Section 8 of Companies Act 2013, to collect donations from individuals and companies and distribute them to political parties.

Eligibility Criteria for Section 80GGB Tax Benefits

• Under Section 80GGB, donations must not be made in cash. Only donations through cheques, e-payments, or demand drafts are eligible, ensuring the proper and official recordings of all contributions.
• Donations must be made to a political party registered under Section 29A of the Representation of the People Act, 1951, or to an electoral trust, to qualify for deductions.
• Any person can receive the donation, except those associated with a local authority or funded, wholly or partially, by the government.

Registration of Political Parties Under Section 80GGB

• A political party that is willing to register under Section 80GGB must first apply to the commission within 30 days of its emergence as per the guidelines given by the Election Commission of India.

• As per the guidelines mentioned in Article 324 of Commission of India and Section 29A of Representation of People Act, 1951, the applicant political party has to publish the proposed name of party in two local newspapers and two national newspapers or two days in same newspapers, to verify that there are no objections.

Exceptions to Section 80GGB

• All Indian companies registered under the Companies Act 2013 can make donations to political parties or electoral trusts and claim a tax deduction under Section 80GGB. However, government organizations and companies that have been in existence for less than three years are not eligible.
• Political parties and their office bearers are not allowed to accept contributions from foreign individuals or foreign companies.

Section 80GGB Deduction Limit

• There is no limit on the tax deduction amount. A qualifying company is eligible for 100% tax-deductible on any amount of donation to a political party under Section 29A of the RPA (Representation of People Act), 1951 (as per amendment under Finance Act, 2017).
• Under Section 182 of the Companies Act, 2013, companies are not required to disclose the political party they donated to. Expenses like TV ads, radio jingles, or sponsored social media posts by a political party also count as donations under this section.
• Corporate donations are fully tax-deductible under Section 80GGB of Income Tax Act.

Contributions Under Section 80GGB

• A company may make donations or payments to individuals or groups involved in activities that support a political party or political purpose.
• This includes any expense the company makes, directly or indirectly, including those on advertisements in publications like brochures, keepsakes, pamphlets, or souvenirs that are produced on behalf of political parties. Even if the publication isn’t directly linked to a political party, it adds to its benefits nonetheless.

Important Points to Note to Claim Benefits Under Section 80GGB

• Any company registered in India can make donations to the political party of their choice, as long as the party is registered under Section 29A of the Representation of the People Act, 1951. Donations can be made to multiple parties, and all contributions are eligible for a combined tax deduction under Section 80GGB.
• To qualify, the electoral trust that is responsible for receiving the donation must also be registered and recognized by the appropriate authorities.
• Donations cannot be made in cash. Only demand drafts, electronic transfers, pay orders, or cheques are allowed in order to ensure transparency and proper tracking of political funding.
• Your company can claim a 100% tax deduction for these contributions under Section 80GGB. However, the Companies Act, 2013, requires that the company must disclose the donation amount and the name of the political party in its Profit and Loss account for that financial year.
• However, one exception is that if donations are made through electoral bonds, then the company only needs to report the amount paid, without naming the specificities of the political party.
• Any advertisement placed by a company on a platform owned by a political party, including social media, magazines, or newspapers, is considered a contribution under Section 80GGB and is eligible for a tax deduction.
• Exceptions to these contributions include

• Public Sector Enterprises.
• Companies that are less than three years old.