The Income Tax Bill 2025 introduces significant provisions regarding tax exemptions for political parties and electoral trusts, reinforcing transparency and accountability in political funding. As part of Schedule VIII, these exemptions aim to regulate income sources and ensure compliance with financial reporting norms. Schedule VIII of the Income Tax Bill 2025 outlines income categories exempt from taxation when received by political parties and electoral trusts.
The primary objective of these exemptions is to encourage legal and transparent financial contributions, while preventing undisclosed or illicit funding. The key provisions of Schedule VIII specify that certain types of income should not be included in the total income of eligible political entities, provided that they adhere to prescribed conditions. This framework promotes financial discipline and enhances the credibility of political institutions by mandating comprehensive record keeping and compliance with financial disclosure norms.
Income exemptions
Political parties and electoral trusts enjoy tax exemptions on income generated from various sources, including income from house property, other sources, and capital gains. This provision ensures that any revenue earned from party-owned properties such as rental income or lease payments remains untaxed. Additionally, income arising from capital appreciation, such as the sale of assets or investments held by political entities, is exempt. This exemption allows political parties and electoral trusts to focus on their core objectives without the financial burdens stemming from tax liabilities on non-operational income. The provision also extends to miscellaneous income sources that do not fall within conventional categories, thus enabling these entities to maximise their financial resources for electoral and operational activities.
Political parties and electoral trusts are entitled to receive voluntary contributions from various sources, including individuals, corporate entities, and other organisations. Donations received through electoral bonds, which are key instruments introduced for transparency in political funding, are also covered under this exemption. Stringent conditions are imposed on these contributions to maintain integrity and accountability in financial transactions. The exemption aims to facilitate legitimate financial support for political parties while ensuring that all contributions are accounted for and audited to prevent the misuse of funds. These voluntary contributions play a crucial role in financing political campaigns, operational expenses, and other party functions, thereby allowing parties to sustain themselves without direct dependence on government funding.
To qualify for tax exemptions under Schedule VIII of the Income Tax Bill 2025, political parties and electoral trusts must meet specific regulatory criteria to ensure transparency and compliance with the financial governance norms. A political party must be registered under Section 29A of the Representation of the People Act, 1951, to avail these tax benefits. Additionally, it is mandatory to maintain proper books of accounts and documentation to allow for accurate income assessment.
To enhance transparency, all voluntary contributions exceeding ₹20,000 must be recorded along with the donor’s name and address. Annual audits by a certified accountant are a prerequisite to ensure that financial records are accurate and compliant with regulatory requirements. Furthermore, to prevent untraceable cash transactions, donations above ₹2,000 must be received through banking channels, including electronic transfers or electoral bonds. The party must also submit an annual report under Section 29C(3) of the Representation of the People Act, 1951, and file an income tax return under Section 263(1)(a)(iii) within the prescribed due date to continue availing these exemptions.
Eligibility for electoral trusts
Electoral trusts designed to facilitate transparent political donations must adhere to specific conditions to maintain their tax-exempt status. These trusts are required to distribute at least 95 per cent of the total donations received within a financial year to registered political parties, ensuring that the funds are solely used for electoral and political activities. This requirement prevents electoral trust from accumulating surplus funds for unintended purposes. Additionally, electoral trusts must operate in accordance with the rules prescribed by the Central Government to ensure compliance with legal and financial regulations. By adhering to these guidelines, electoral trusts contribute to a more accountable and transparent political funding system, thus reinforcing public confidence in the democratic process.
Significance of electoral bonds
Electoral bonds, as referenced in Schedule VIII, play a critical role in political funding by offering a structured and transparent mechanism for contribution. These bonds, issued by authorised banks under the Reserve Bank of India Act, 1934, allow donors to contribute funds anonymously while ensuring compliance with financial regulations. The introduction of these provisions in the Income Tax Bill 2025 aims to balance donor anonymity with accountability, thus reducing the influence of untraceable cash donations on political financing.
Tax exemptions granted to political parties and electoral trusts have stringent compliance requirements designed to enhance transparency. By mandating record-keeping, banking transactions, and financial reporting, the government aims to curb black money inflows and illicit political financing. Additionally, the requirement for audited accounts and donor disclosures for contributions exceeding ₹20,000 strengthens political entities’ financial integrity. The shift towards electronic transactions and electoral bonds further minimises cash-based transactions, reducing the scope for corruption and financial malpractice.
Implications for political funding
Tax exemptions under Schedule VIII of the Income Tax Bill 2025 have significant implications for political funding and governance, fostering a more transparent and accountable electoral finance system. By incentivising lawful and regulated political contributions, the Bill discourages unaccounted cash donations, ensuring that financial support for political entities is legal and traceable. Mandated disclosures and the requirement for electronic transactions enhance financial accountability, reducing the risks associated with opaque funding channels.
Additionally, the Bill strengthens electoral trust by mandating that they allocate at least 95 per cent of the funds received to political parties, thereby creating a structured and regulated donation framework. Compliance measures, including audited financial statements, serve as deterrents against money laundering and illicit funding, thus minimising corruption risks within the political sphere. Furthermore, by offering tax exemptions and structured funding avenues, the Bill encourages both corporate and individual participation in the democratic process, ultimately fostering greater civic engagement and strengthening the country’s political financing integrity.
Challenges and criticism
While the Income Tax Bill 2025 introduced crucial transparency measures in political funding, several challenges and criticisms persist. One major concern is donor anonymity, as electoral bonds enable contributors to remain undisclosed, raising fears of undisclosed corporate and foreign influence in the political landscape. In addition, despite stringent compliance norms and mandated audits, potential loopholes may still be exploited, allowing unaccounted transactions to bypass regulatory scrutiny.
Equitable distribution of funds also remains a pressing issue, as smaller political parties may struggle to attract donations, leading to a disproportionate financial advantage for larger well-established parties. Furthermore, while the Bill enhances reporting requirements and mandates greater financial disclosure, public scepticism regarding political funding mechanisms persists, highlighting the need for continuous reforms to build greater trust and confidence in the system.
The path forward
The tax exemptions provided under Schedule VIII of the Income Tax Bill 2025 represent a significant step towards ensuring financial transparency in political funding. By enforcing strict compliance norms and encouraging structured contributions, the government aimed to create a more accountable electoral financing ecosystem.
However, continuous monitoring, regulatory refinement, and public awareness are essential for maximising the effectiveness of these provisions and ensuring a fair democratic process. As India moves towards an increasingly digital and transparent financial landscape, political funding reforms will play a crucial role in shaping electoral integrity and public trust in governance. The success of these measures depends on stringent enforcement, periodic audits, and stakeholder collaboration to address existing gaps and potential challenges in the system.
The writer is Assistant Professor, Department of Commerce, St. Thomas College (Autonomous) Thrissur, Kerala