Income Tax Notice issued to Salaried Taxpayers for Donations to Political Parties

The Income Tax Department sent notices to a number of taxpayers who donated to registered political parties that are not recognized by the Election Commission.

The notices given to individuals and corporates, are for donations made in FY21 and FY22 and are intended to determine whether such payments to lesser-known political parties were used to evade taxes and launder money, according to people familiar with the situation.

“So far, around 5,000 notices have been sent for FY21 and FY22. We will send out more notices in the coming days,” a top official said. The donations were made to approximately 20 registered but unrecognised political parties, according to the official.

Donations to a recognized electoral trust or political party are tax-deductible at 100%. This is subject to a total deduction that does not exceed the individual’s entire income.

Donations did not match claimed income, and it is assumed that these parties returned some of the funds in cash, according to the aforementioned official.

“We have sent notices where the donation was not proportional to income,” a senior official stated. In certain circumstances, taxpayers have sent up to 80% of their income to a political party that is not even legally registered.

Registered political parties are considered unrecognised if they have not competed or achieved a qualifying vote percentage threshold in assembly or national elections.

The department issued identical notices last year, resulting in revised returns with penalties and interest.

Officials stated that evading taxes in this manner will be more difficult beginning in FY23 due to stricter compliance rules. CBDT amended ITR-7, which is filed by political parties and charitable trusts, in 2022. From this year, persons with an income of more than Rs.50 lakh must provide more information about their contributions to political parties.