Section 80GGB offers one of the many income tax deductions available in the Income Tax Act, 1961. This section specifically deals with donations to political parties. According to section 80GGB, any donation or contribution to a political party or an electoral trust by an Indian company is exempt from taxation.
As the section doesn’t specify any limit with respect to the quantum of donation, there’s no restriction on the amount that can be contributed to a political party in India. However, in order to claim an exemption, the company has to maintain proof of the contribution made to the political party or the electoral trust.
The exemption under section 80GGB of the Income Tax Act can be claimed by an Indian company only upon the satisfaction of the following terms and conditions.
Donations or contributions in cash are not permitted and cannot be claimed as deductions under section 80GGB of the Income Tax Act. The contributions can be made via demand drafts, pay orders, electronic fund transfers, or cheques.
The political party receiving the donation must be registered under Section 29 of Representation of People Act, 1951.
Under section 80GGB, it is mandatory that the donor preserves documentary evidence of the donations and contributions made, in order to claim income tax deductions.
Any advertisement published by an Indian company on a political party’s platform such as social media, magazine, or newspaper can also be claimed as a contribution under the provisions of this section.
Any Indian company registered under the Companies Act is eligible for claiming deductions under section 80GGB. However, public sector enterprises and companies not older than 3 years from the date of their incorporation are expressly prohibited from making donations and contributions to political parties. As section 80GGB of the Income Tax Act doesn’t govern foreign companies, political parties are barred from accepting any kind of contribution or donation made by such companies.
The donations and contributions made to political parties are fully deductible from the total income of the donor company. However, a company cannot claim income tax deductions under section 80GGB in excess of its taxable income. Briefly explained below are the steps involved in claiming 80GGB tax deductions.
Step 1: Compute the total income of the company.
Step 2: Identify the total amount contributed by the company towards political parties and electoral trusts during the year.
Step 3: Deduct the total amount of contributions made by the company during the year from the computed total income. The resulting figure is the total taxable income on which the company is required to pay tax.
Here are some important points that you should keep in mind while incorporating the provisions of section 80GGB of the Income Tax Act.
Contributions in cash are expressly prohibited under section 80GGB.
Electoral trusts receiving donations are also required to be recognized and registered by the appropriate authorities.
There’s no limit on the number of political parties or electoral trusts that an eligible donor company can contribute to.
While there’s no limit specified under 80GGB with respect to the quantum of contribution made by an Indian company, the Companies Act, 2013 levies certain restrictions. According to the act, Indian companies cannot contribute more than 7.5% of their average net annual profit during the three previous financial years.
Donor companies are required to disclose donations and contributions in their Profit and Loss statement along with the name of the political party under section 182 of the Companies Act, 2013.
Disclosure of the name of the political party is not necessary when making contributions through electoral bonds.
The provisions of section 80GGB of the Income Tax Act were introduced specifically to encourage Indian companies to contribute to political parties. In order to successfully claim income tax deductions under this section, it is imperative to maintain a detailed record of the amount being donated to political parties and electoral trusts. This way, you can minimize the chances of your claim getting rejected or disallowed by the Income Tax authorities.
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