Deduction in respect of contributions given by any person to political parties

137

An assessee, (other than a local authority and an artificial juridical person wholly or partly funded by the Government), shall be allowed a deduction for the amount contributed by him, other than by way of cash, during a tax year to a political party registered under section 29A of the Representation of the People Act, 1951, or an electoral trust.

Explanation

Section Summary:

Section 137 of the new income tax law allows taxpayers (excluding local authorities and government-funded artificial juridical persons) to claim a deduction for contributions made to political parties or electoral trusts. However, this deduction is only applicable for contributions made through non-cash methods (e.g., cheque, bank transfer, etc.). The political party must be registered under Section 29A of the Representation of the People Act, 1951.

Key Changes:

1. Exclusion of Cash Contributions: Unlike earlier provisions, cash contributions to political parties are no longer eligible for deductions. Only non-cash contributions qualify.
2. Eligible Entities: The deduction is now explicitly limited to contributions made to political parties registered under Section 29A of the Representation of the People Act, 1951, or electoral trusts.
3. Exclusion of Certain Entities: Local authorities and government-funded artificial juridical persons are explicitly excluded from claiming this deduction.

Practical Implications:

• For Individuals and Businesses: Taxpayers can reduce their taxable income by claiming deductions for contributions made to eligible political parties or electoral trusts, provided the contributions are made via non-cash methods.
• For Political Parties: This provision encourages transparency in political funding by discouraging cash donations and promoting traceable methods of contribution.
• For Excluded Entities: Local authorities and government-funded artificial juridical persons cannot claim this deduction, which may impact their financial planning.

Critical Concepts:

• Artificial Juridical Person: A legal entity created by law, such as a corporation or trust, which is treated as a person under the law but is not a natural person.
• Section 29A of the Representation of the People Act, 1951: This section governs the registration of political parties in India. Only parties registered under this provision are eligible to receive deductible contributions.
• Electoral Trust: A trust established to distribute contributions to political parties in a transparent manner.

Compliance Steps:

1. Ensure Eligibility: Verify that the political party or electoral trust is registered under Section 29A of the Representation of the People Act, 1951.
2. Use Non-Cash Methods: Make contributions via cheque, bank transfer, or other non-cash methods to qualify for the deduction.
3. Maintain Documentation: Keep records of contributions, such as receipts or bank statements, to substantiate the claim during tax filing.
4. Claim Deduction: Include the contribution amount in the appropriate section of the income tax return to claim the deduction.

Examples:

• Scenario 1: An individual donates ₹50,000 to a registered political party via a bank transfer. They can claim this ₹50,000 as a deduction under Section 137, reducing their taxable income.
• Scenario 2: A corporation donates ₹5 lakhs to an electoral trust through a cheque. The corporation can claim this ₹5 lakhs as a deduction, lowering its taxable income.
• Scenario 3: A local authority donates ₹1 lakh to a political party via a bank transfer. Since local authorities are excluded under this section, they cannot claim any deduction for this contribution.