22 Mar Optimizing Tax Planning with Political Party Donations
The difference between tax saving and tax evasion becomes apparent when individuals seek deductions under sections 80GGB/80GGC of the Income Tax Act 1961 for contributing funds to a political party or an electoral trust.
Eligibility for Deductions
- Entities eligible for deductions: Individuals, Hindu Undivided Families (HUFs), Firms, Associations of Persons (AOPs), Bodies of Individuals (BOIs), and Companies under section 80GGB.
Deduction Limits
- Individuals, HUFs, Firms, AOPs, BOIs: 100% deduction without any upper limit.
- Companies: Limited to 7.5% of annual net profit averaged over 3 years.
Tax Savings Example
|
Gross Total Income
|
Donation Amount
|
Deduction Claimed
|
Tax Savings
|
|---|---|---|---|
|
Rs. 10,00,000/-
|
Rs. 2,00,000/-
|
Rs. 2,00,000/-
|
Substantial
|
- Note: Donations must be non-cash and made to registered parties under section 29A of the Representation of the People Act, 1951.
Risks of Bogus Donations
- Bogus Donation: Some parties return a percentage of donated funds, leading to scrutiny.
Consequences of Failure to Prove Genuineness
- Tax Liability: Tax at applicable slab rate.
- Interest: Imposed for late payment.
- Penalties: Up to 200% of tax payable for misreporting income.
- Assessment: Transactions can be treated as bogus, taxed at 60% under section 115BBE.
Steps to Prove Genuineness
- Obtain Registration Certificate: Confirm party registration under section 29A.
- Verify on Official Website: Check legitimacy on eci.gov.in.
- Request PAN Card: Obtain PAN of the political party.
- Cross-Verify Bank Details: Use cancelled cheque.
- Get Stamped Receipt: Ensure a physical receipt from the party.
Supporting Documentation
- PAN card of the political party.
- Cancelled cheque for bank details verification.
- Physical receipt stamped by the party.
Conclusion
Donating to political parties can offer tax benefits but requires careful consideration, documentation, and compliance to avoid penalties. Proper evidence is crucial to substantiate the genuineness of the transaction.
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