Funding of Political Parties in India

7 min read • Published 28 November 2022
Written by Vinit Kulkarni
Funding of Political Parties in Budget

Political parties are funded by donations from multiple sources. One of the largest sources of funding is voluntary contributions made by individuals and party supporters. 

However, political funding can be a murky business in all kinds of democracies. To make the entire process transparent, the government has introduced various reforms in the Finance Bill, 2017. 

Keep reading to learn more about the various aspects of political funding. 

What Is Political Funding?

Political funding is the method that political parties use to raise funds to finance their regular activities and election campaigns. Political parties require money to pitch their ideologies and objectives and take necessary action to get votes and win elections. 

According to Section 29B of the Representation of the People’s Act (RPA), parties are entitled to accept voluntary contributions from any individual or company except government entities. However, according to Section 29C of the Finance Bill Act, it is mandatory for political parties to declare donations that exceed Rs. 20,000. 

This declaration must be done in the form of a report and submitted to the Election Commission. Failure to do so will make them ineligible for tax deduction under the  Income Tax Act of 1961. 

What Methods Do Indian Political Parties Use to Raise Funds?

There are different ways by which political parties raise their funds. They are:

  • Individuals: Political parties can receive donations from individuals according to Section 29B of RPA Act. 
  • Public or State Funding: Under this, the government provides funds to parties for expenses concerning elections. Public funding has two types of funding, namely:
  • Direct Funding: In this, the government directly funds political parties. Direct funding by means of tax is prohibited in India.

  • Indirect Funding: Under this, political parties try to get funding by requesting access to media, public places for rallies, and free or subsidized transport facilities. This type of funding is permitted in India in a regulated form. 
  • Corporate Funding: Any donation made by a corporate entity in India is governed by Companies Act, 2013. Under Section 182 of the Act,  following conditions must be met for donating:
  • The company must be at least three years old to be able to fund a political party.

  • The board of directors must approve the contribution. 

If the company does not follow these provisions, it will have to pay a fine of around 5 times of what they have contributed. Apart from this, officers of the company who are at fault will get a punishment of imprisonment for up to 6 months.

  • Electoral Trust: This is a non-profit company created in India to receive voluntary contributions from individuals or domestic companies. 

According to the central government’s mandate, 95% of donations to the firm will have to be donated to registered political parties every financial year.

As per the guidelines of the Election Commission, electoral trusts that were started after 2013 will need to declare details of funds they have received and disbursed. 

What Are the Prevalent Issues of Political Funding?

There are several infirmities that Indian political financing has been suffering for a long time. 

  • Firstly, a steady flow of undocumented cash is helping parties and candidates to continue with their activities. 
  • There is no transparency regarding political funding that parties receive. In most cases, identity of the donor is unknown. 
  • There is no system of an independent audit of political parties. This makes the book of accounts offered by parties vague and fictional. 
  • There have been instances where corporate companies are routing their black money to party funding illegally. 
  • People and organisations that fund political parties influence the decision-making process of the parties. 
  • As cases of funding from hidden sources increase, so is the expenditure on election campaigns. This altogether is impacting the economy of the country. 
  • Political parties are taking advantage of gaps in rules and regulations to avoid any reporting of funding and donations. 

Government Initiatives to Bring Transparency

The Election Commission of India has been taking certain steps to make the political funding system more transparent. The government came up with certain amendments and changes in this regard that have been discussed below: 

  • The government has approved the election commission’s proposal of reducing anonymous political donations to ₹2,000 from ₹20,000.. It will prevent individuals and companies from donating via cash and compel them to use other methods like cheques or digital payments. 
  • The government also introduced the concept of electoral bonds in 2018. The bonds will work as a time-limited bearer instrument like a promissory note. Anyone can buy these from scheduled banks and transfer them to the political party’s registered bank account. Therefore, the funds will flow through the banking system rather than getting converted into black money. However, the donor will remain anonymous, and the parties will not have to report the deposits. 
  • The Finance Bill, 2020 has made a key amendment to Foreign Contribution Regulation Act 2010. This prohibits foreign companies from funding certain persons in India.
  • The government has removed the cap that prevented companies from donating more than 7.5% of their profit to a political party. The Finance Bill Act has also removed the obligation to report contributions made by the company in its profit and loss statement.

Tax Exemptions on Donations Made to Political Parties

As per Section 13A of the IT Act, political parties enjoy 100% tax exemption on income generated from house property, other sources, capital gains and voluntary contributions received from any person. 

However, the political party needs to fulfill certain conditions to avail the exemption. The conditions have been discussed below: 

  • Has to be registered under Section 29A of the RPA.
  • Has to maintain books of account and other documents, which are to be audited by a chartered accountant. 
  • Has to maintain records of each contribution of more than Rs 20,000. 
  • Has not received any donation of more than Rs 2,000 otherwise than through an account payee cheque/demand draft or through bank account or electoral bond.
  • Treasurer of the political party has to furnish a report of donations received in excess of Rs 20,000 to Election Commission of India on or before the due filing date. 

Additionally, corporate donors are eligible for tax exemption for their donations to political parties under Section 80GGB of the Income Tax Act, 1961. Any individual (except every artificial judicial person and local authority partly or wholly funded by the government) is eligible to claim tax exemption under Section 80GGC of the Income Tax Act, 1961. 

The taxpayers will be eligible for this exemption only if they make the contributions through any payment mode other than cash.

Final Words

As per an article by Scroll, India’s seven national parties got 67% of their funding from unknown sources during the 2019 Lok Sabha elections. Although the Election Commission claims that the new provisions will bring transparency, according to some sources, some of the provisions have made the process more opaque than it was before. 

Therefore, the government might take stronger steps in the future to make political funding less corrupt.

Frequently Asked Questions

Do political parties require to maintain separate accounts for the funds received for different purposes?

Political parties are required to maintain the accounts of the funds received for different purposes under the heads of publicity, travel, candidates and other expenses.

Are the accounts of political funds made public?

The contesting political parties need to file their expenditure statement to the Election Commission of India according to the format specified by the commission. 

The political parties need to file this statement within 90 days of the Lok Sabha elections and 75 days of Assembly Elections, respectively. 

After this, the Election Commission will make the statements available to the public through links on their website for public scrutiny.

Is there any upper limit on the expenditure of political parties?

No, there is no upper limit on how much a political party can spend during election campaigns. However, the Election Commission has set a limit on the expenditure of candidates who are contesting in an election.

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Vinit Kulkarni

Credit Principal
CA with experience in Credit and Risk, has underwritten loan book of 500Cr+. Previously worked at Essel Finance and Western Capital.

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