Income of Political Parties and Electoral Trusts under Section 12

Understand Income of Political Parties and Electoral Trusts

Key rules to remember

Political party: income excluded

Income from house property + Income from other sources + Capital gains + voluntary contributions → not included in total income if conditions (a) to (f) are met

Eligible person: a political party registered under section 29A of the Representation of the People Act, 1951. Business income is not in this list.

Political party: books and records

(a) books of account enabling the Assessing Officer to deduce income; (b) record of name and address of each voluntary contributor above ₹20,000 (other than electoral bond); (c) accounts audited by an accountant

The ₹20,000 limit applies to each contribution. Electoral bond contributions are excluded from condition (b).

Political party: mode of receipt

No donation exceeding ₹2,000 received otherwise than by account payee cheque, account payee bank draft, electronic clearing system through a bank account, other prescribed electronic mode, or electoral bond

Donations up to ₹2,000 in any mode do not breach this condition. Cash above ₹2,000 does.

Political party: reports and return

(e) treasurer or authorised person submits report under section 29C(3) of the Representation of the People Act, 1951; (f) return furnished as per section 263(1)(a)(iii) and 263(2) by the due date in section 263(1)(c)

All six conditions (a) to (f) must be satisfied for Row 1.

Electoral trust: income excluded

Voluntary contributions received → not included if (a) and (b) are met

Eligible person: an electoral trust.

Electoral trust: distribution

Distribution to registered political parties in the tax year ≥ 95% × (aggregate donations received in the year + surplus brought forward from earlier tax years)

The parties must be registered under section 29A of the Representation of the People Act, 1951. The second condition is that the trust functions as per the Central Government's rules.

Consequence of default

Condition not satisfied in a tax year → that income is charged to tax for that year (section 12(2))

Applies to the income for which the condition failed, in that tax year.

How to solve Income of Political Parties and Electoral Trusts questions

1. 1Identify the assessee: a political party registered under section 29A of the Representation of the People Act, 1951, or an electoral trust. If neither, Schedule VIII does not apply.
2. 2Classify each income: house property, other sources, capital gains, voluntary contributions (party) or voluntary contributions (trust). Note any income outside the list, such as business income.
3. 3For a party, tick conditions (a) to (f) one by one: books, records of contributors above ₹20,000, audit, mode of receipt above ₹2,000, section 29C(3) report and return on time.
4. 4For an electoral trust, compute the required distribution: 95% of donations received in the year plus surplus brought forward. Compare it with the amount actually given to registered parties in that year.
5. 5Also check that the trust functions as per the Central Government's rules.
6. 6If every condition is met, exclude the income. If any condition fails, apply section 12(2) and include the affected income in total income for that tax year.
7. 7Compute tax on the included income, if any, and state the conclusion clearly.

Quickest way: Two-row checklist

Common mistakes in Income of Political Parties and Electoral Trusts

• Mixing up ₹20,000 and ₹2,000.

  Both limits appear in the same row and both concern donations.

  Fix: Link ₹20,000 to keeping the donor's name and address, and ₹2,000 to the mode of receipt.

• Saying a cash donation of exactly ₹2,000 breaches the condition.

  Students read the limit as 'up to'.

  Fix: The condition bars donations exceeding ₹2,000 received otherwise than by the permitted modes. ₹2,000 itself is not a breach.

• Treating the 95% test as 95% of donations only.

  The surplus clause is easy to skip.

  Fix: The base is donations received in the year plus surplus brought forward from earlier tax years.

• Confusing section 12 with sections 136 and 137.

  All three concern political parties.

  Fix: Section 12 and Schedule VIII concern the recipient's income. Sections 136 and 137 give the donor a deduction for non-cash contributions.

• Holding that failure of one condition makes the whole exemption lost for all years.

  Students assume exemption is permanent once granted.

  Fix: Section 12(2) works for the tax year in which the condition is not satisfied, for the income affected.

• Excluding business income of a political party.

  Students assume all income is covered.

  Fix: Row 1 lists house property, other sources, capital gains and voluntary contributions. Do not extend it beyond the list.

Worked examples