The Income Tax (IT) department has cracked down on dubious political donations, issuing several hundred notices with a long list of questions to individuals who made suspicious donations of over ₹5 lakh to lesser-known political parties in the financial year 2020-21.
Tax officials have sent notices and summons to taxpayers who claimed 100% tax deductions on political donations, only to have the money returned to them in cash.
A scrutiny of political donation records revealed that 9,000 individuals donated ₹5 lakh or more in FY 2020-21 and claimed tax exemptions under Section 80GGC in return.
“The donors gave money through cheques but received the same amount back in cash, effectively making it a form of money laundering. A commission of 1-3% was charged on such sham transactions,” confirmed a senior tax official.
According to Income Tax rules, full tax deductions can be claimed on donations made to political parties, reducing tax liability. Under the current regulations, there is no upper limit on donations made to registered political parties.
The investigation wing of the IT department has warned that assesses who wish to voluntarily comply can file an updated income tax return under Section 139(8A) and pay the applicable additional tax, which is a maximum of 70%. Otherwise, a 200% penalty could be imposed on such dubious transactions.
In February last year, the Income Tax department sent over 5,000 notices to taxpayers who had donated to around 20 political parties not recognized by the Election Commission.
These notices were issued to individuals and corporates for donations made in FY 2020-21 and FY 2021-22, suspected to be linked to tax evasion and money laundering. As a result, many taxpayers had to file updated returns and pay penalties and interest on the evaded tax.
Tightened compliance norms following CBDT’s amendments to ITR-7, the form filed by political parties and charitable trusts, have led to the detection of mismatched and irregular donations disproportionate to declared incomes.
