Income Tax 2025

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B.—Incomes not to be included in total income of political parties and electoral trusts

Section 12: Incomes not included in total income of political parties and electoral trusts. ​

12(1) ​

In computing the total income of any political party or an electoral trust for a tax year under this Act, any income enumerated in Schedule VIII shall not be included, subject to fulfilment of conditions specified therein.

12(2) ​

Wherever the conditions referred to in Schedule VIII are not satisfied in any tax year in respect of any income enumerated in the said Schedule, such income shall be charged to tax under this Act for that tax year.

12(3) ​

The Central Government may make rules or issue notifications for the purposes of this section as specified in the Schedule VIII.

Explanation

1. Section Summary ​

This section exempts certain incomes of political parties and electoral trusts from being included in their total taxable income, provided they meet specific conditions outlined in Schedule VIII of the Income Tax Act. If these conditions are not met, the income becomes taxable. The Central Government has the authority to issue rules or notifications to clarify or implement this section.

2. Key Changes ​

  • New Exemption Framework: Unlike the previous Income Tax Act, which provided blanket exemptions for political parties under Section 13A, this section introduces a more structured approach. Exemptions are now conditional and tied to specific types of income listed in Schedule VIII.
  • Conditional Taxation: If the conditions in Schedule VIII are not met, the income becomes taxable, which is a stricter compliance requirement compared to the earlier regime.
  • Central Government’s Role: The government now has explicit authority to issue rules or notifications to govern this section, adding flexibility and clarity to its implementation.

3. Practical Implications ​

  • For Political Parties and Electoral Trusts: They must ensure compliance with the conditions in Schedule VIII to retain tax-exempt status for certain incomes. Failure to comply will result in taxation of the income.
  • Increased Scrutiny: Tax authorities may closely monitor compliance with Schedule VIII conditions, leading to stricter audits for political entities.
  • Documentation Burden: Political parties and electoral trusts will need to maintain detailed records to prove compliance with the conditions.

4. Critical Concepts ​

  • Schedule VIII: A list of specific incomes and conditions that must be met for exemption. For example, it may include donations, grants, or other sources of income, along with conditions like maintaining proper books of accounts or filing returns on time.
  • Taxable Income: If conditions are not met, the income enumerated in Schedule VIII will be added to the total income and taxed at applicable rates.
  • Interaction with Other Laws: This section works alongside other provisions of the Income Tax Act, such as those governing donations (e.g., Section 80GGC for donors) and filing requirements (e.g., Section 139 for returns).

5. Compliance Steps ​

  1. Identify Exempt Incomes: Review Schedule VIII to determine which incomes are eligible for exemption.
  2. Fulfill Conditions: Ensure compliance with all conditions specified in Schedule VIII, such as maintaining proper records, filing returns, or adhering to donation limits.
  3. Documentation: Keep detailed records of income sources, expenditures, and compliance measures.
  4. File Returns: Submit timely and accurate tax returns, even if income is exempt, to demonstrate compliance.
  5. Monitor Notifications: Stay updated on any rules or notifications issued by the Central Government that may affect compliance.

6. Examples ​

  • Scenario 1: A political party receives a donation of ₹10 lakhs. If the donation meets the conditions in Schedule VIII (e.g., the donor provides a PAN and the party files its return on time), the ₹10 lakhs is exempt from tax. If not, the ₹10 lakhs is added to the party’s taxable income.
  • Scenario 2: An electoral trust earns interest income from fixed deposits. If the trust complies with Schedule VIII conditions (e.g., uses the income for electoral purposes and maintains proper accounts), the interest income is exempt. Otherwise, it is taxed.

This section aims to balance the need for transparency and accountability in political funding while providing tax relief for compliant entities.