Income Tax Department intensifies scrutiny on political donation claims under Section 80GGC

The Income Tax Department has intensified its scrutiny of taxpayers claiming deductions on political donations under Section 80GGC of the Income Tax Act over the past two to three assessment years, sources told CNBC-TV18.

Several taxpayers have reportedly received notices via email and SMS requesting them to furnish proof of donations and clarify the source of funds used for such contributions.

The crackdown comes amid growing suspicion within the tax authorities that “many donation claims under this section are either inflated or fabricated,” sources said. “Some donations were made in cash or kind, which are ineligible for deductions under existing tax rules.

In certain instances, deductions have been claimed for contributions made to political parties or entities not recognised by the Election Commission—disqualifying them from tax benefits. To check this, the tax department is nudging taxpayers,” sources added.

Taxpayers receiving these communications have been urged to respond promptly or consider rectifying their returns by reversing ineligible deductions, sources added.

Section 80GGC permits a 100% tax deduction for donations made to political parties or electoral trusts registered under Section 29A of the Representation of the People Act, 1951. However, only donations routed through legitimate banking channels—such as cheques, demand drafts, credit or debit cards, and online transfers—qualify for the deduction. Contributions made in cash or kind are expressly excluded.

Additionally, the law caps the eligible deduction at 10% of the donor’s gross annual income, with any amount exceeding this limit disallowed.

The Income Tax Department has emphasised “the need for taxpayers to provide documentary evidence, including bank statements and donation receipts, to substantiate their claims. Failure to comply may lead to disallowance of deductions and the imposition of penalties,” sources added.

This intensified scrutiny aligns with the government’s broader efforts to enhance transparency and accountability in political funding and to prevent misuse of tax provisions for illegitimate claims. The final outcome of this entire scrutiny remains to be seen.

Sandeep Sehgal, Partner – Tax, AKM Global, a tax and consulting firm, states, “The Income Tax Department has initiated a proactive compliance measure by sending SMS alerts to taxpayers who have claimed deductions under Section 80GGC, pertaining to donations made to political parties. This outreach is designed to encourage taxpayers to re-verify their claims for any inadvertent errors or inconsistencies, rather than serving as an accusation of wrongdoing.

Claims for donations made to unrecognised political entities or inflated claims lacking proper documentation are susceptible to being flagged for scrutiny. Therefore, taxpayers have been asked to ensure that their contributions strictly adhere to these conditions and are robustly supported by verifiable proof of payment and official documentation confirming the political party’s recognition status.

A significant facilitation for taxpayers is the extension of the facility to file updated ITRs for an additional two years, as announced in the Union Budget 2025. This provision offers a broader opportunity for taxpayers to rectify genuine mistakes or omissions in their original returns without facing penal consequences, thereby promoting a more compliant tax environment.

This initiative by the Income Tax Department aligns with the government’s broader agenda of leveraging data-driven tax enforcement. It is paramount to verify the legitimacy and authenticity of the donations made, ensuring they comply with all statutory requirements, including proof of payment and the recognised status of the political party.

Taxpayers should proactively take advantage of the extended updated return filing window to correct any genuine mistakes or omissions identified during this review. This diligent approach will ensure full compliance with tax laws, mitigate potential risks, and help avoid future scrutiny and penal consequences.”

Abhishek A Rastogi, leading constitutional and tax expert, underscored the gravity of the situation, highlighting legal, ethical, and systemic dimensions.

“The misuse of Section 80GGC is not merely a tax compliance issue; it threatens the constitutional integrity of electoral processes. When tax incentives meant to support democratic institutions are converted into instruments of tax evasion, the rule of law is directly undermined. There is an urgent need for the legislature and the Election Commission to revisit the framework governing RUPPs, including their financial disclosures, donor transparency, and audit mechanisms.

Individuals claiming deductions under Section 80GGC must exercise due diligence. Any false claim, whether deliberate or otherwise, can invoke penal provisions under Section 270A and Section 271AAC of the Income Tax Act, resulting in penalties ranging from 100% to 300% of the tax sought to be evaded. Those who have received notices should consider voluntary compliance under Section 139(8A), which allows updated ITRs within 24 months, thereby minimising exposure to litigation and higher penalties.”

Rastogi pointed out that this situation presents a serious policy lacuna. “This case highlights how well-intentioned provisions, such as Section 80GGC, can be weaponised in the absence of institutional safeguards. There must be statutory vetting of political parties, including a mechanism for pre-approval of eligible entities and mandatory reporting to both the CBDT and Election Commission.”

Rastogi recommended the introduction of a central digital repository where political parties must declare all donations received under Section 80GGC, along with the donor’s PAN. This would facilitate real-time verification and curb post-facto fraud.

Source: CNBC TV18