Income of Political Parties and Electoral Trusts: Tax Exemption Conditions (Income Tax Act 2025)

Under section 12 of the Income-tax Act, 2025, certain income of a political party or an electoral trust is left out of its total income, but only if the conditions in Schedule VIII are met for that tax year. A registered political party gets the benefit on income from house property, other sources and capital gains, including voluntary contributions. An electoral trust gets it on voluntary contributions, if it passes on 95% of its donations to registered parties. Miss a condition and that year's income is taxed under section 12(2).

This guide covers who qualifies, each condition in plain language, two worked examples and the usual mistakes. The text is as amended by the Finance Act, 2026 (tax year 2026-27 onwards). It is general information, not advice on a specific party or trust.

What does section 12 of the Income-tax Act, 2025 say?

• Section 12(1): income listed in Schedule VIII is not included in the total income of a political party or electoral trust, subject to the conditions in that Schedule.
• Section 12(2): if the conditions are not satisfied in a tax year for an item of income, that income is charged to tax for that tax year.
• Section 12(3): the Central Government may make rules or notifications for the purposes of the section, as the Schedule specifies.

The test is applied year by year. Failing in one tax year does not by itself take away the exemption for another year.

Which income of a political party is not taxed?

Schedule VIII, Table Sl. No. 1 covers a political party registered under section 29A of the Representation of the People Act, 1951. The following income is not included in its total income:

• income chargeable under the head "Income from house property";
• income chargeable under the head "Income from other sources";
• income chargeable under the head "Capital gains"; and
• income by way of voluntary contributions received from any person.

Business income is not on this list.

What conditions must a political party meet?

All six conditions in column D of Sl. No. 1 must be satisfied.

Condition	What it requires
(a) Books of account	Keep books and other documents that let the Assessing Officer properly deduce the party's income.
(b) Record of contributors	For each voluntary contribution above Rs 20,000 (electoral bonds excluded), keep a record of the contribution and the name and address of the person who made it.
(c) Audit	The party's accounts are audited by an accountant.
(d) Mode of receipt	No donation above Rs 2,000 is received except by account payee cheque, account payee bank draft, electronic clearing system through a bank account, another prescribed electronic mode, or an electoral bond.
(e) Treasurer's report	The treasurer, or another person authorised by the party, submits the report under section 29C(3) of the Representation of the People Act, 1951 for that tax year.
(f) Return of income	The party files its return for the tax year under section 263(1)(a)(iii) and 263(2) on or before the due date in section 263(1)(c).

"Electoral bond" here means a bond referred to in the Explanation to section 31(3) of the Reserve Bank of India Act, 1934 (Schedule VIII, Note).

Which income of an electoral trust is not taxed?

Schedule VIII, Table Sl. No. 2: any voluntary contributions received by an electoral trust are not included in its total income, if both conditions hold:

1. During the tax year, the trust distributes to a political party registered under section 29A of the Representation of the People Act, 1951 95% of the aggregate donations received in that tax year, along with the surplus, if any, brought forward from an earlier tax year; and
2. the trust functions as per the rules made by the Central Government.

Those rules are in rule 289. Among other things, it limits who can give (Indian citizens, Indian-registered companies, and resident firms, HUFs, AOPs and BOIs), bars cash, requires the contributor's PAN, allows management spending of up to 5% of contributions (capped at Rs 5,00,000 in the first year and Rs 3,00,000 later), requires distribution to eligible parties before 31 March of the tax year, and requires an audit report in Form No. 181 by the section 263(1)(c) due date. Read rule 289 in full for the trust's other obligations.

How do I check whether income is exempt? A quick flow

Worked example 1: does an electoral trust meet the 95% test? (tax year 2026-27)

Assumptions: an electoral trust receives donations of Rs 40,00,000 during tax year 2026-27 and has a surplus of Rs 2,00,000 brought forward from an earlier tax year. The 95% test is applied to donations plus the brought-forward surplus.

Step	Working	Amount (Rs)
1. Donations in the year	given	40,00,000
2. Add brought-forward surplus	given	2,00,000
3. Base for the test	40,00,000 + 2,00,000	42,00,000
4. Minimum to distribute	95% of 42,00,000	39,90,000
5. Trust actually distributes	given	39,00,000
6. Shortfall	39,90,000 - 39,00,000	90,000

The trust has distributed less than 95%, so condition (a) of Sl. No. 2 is not met. Under section 12(2), the contributions are charged to tax for 2026-27. Had it distributed Rs 39,90,000 or more to registered parties in that year, the condition would be met (subject to condition (b)).

Worked example 2: which donations can a party receive in cash? (tax year 2026-27)

Assumptions: a registered party receives the following in 2026-27. It applies conditions (b) and (d) of Sl. No. 1.

Donation	Mode	Condition (d) (limit Rs 2,000 otherwise)	Condition (b) (record above Rs 20,000)
Rs 2,000	Cash	Not above Rs 2,000, so cash is allowed	No record required
Rs 2,500	Cash	Above Rs 2,000 and not by a permitted mode: condition fails	No record required
Rs 2,500	Account payee cheque	Permitted mode	No record required
Rs 25,000	UPI through a bank account	Allowed if UPI is an electronic mode covered by condition (d); check the prescribed modes	Name and address record required

The Rs 2,500 cash receipt breaks condition (d) for the year. Because all six conditions must hold together, the party's contributions and other listed income for that year become taxable under section 12(2).

Real-life example 1: a party treasurer

Ravi is the treasurer of a registered party. He keeps a donor register with name and address for every contribution above Rs 20,000, has the accounts audited, submits the treasurer's report and files the party's return by the due date. All six conditions are met, so the party's contributions and its rent and interest income stay out of total income for the year. In the following year the party misses the return due date. Condition (f) fails for that year and the income is taxed for that year under section 12(2).

Real-life example 2: an electoral trust at year end

Meena manages an electoral trust. In March she totals the year's donations and the surplus carried from last year, then calculates 95% of that sum. She makes the final transfer to the registered parties before 31 March so that the distribution falls inside the tax year, because the condition counts what is distributed during that year.

What is the due date for a political party's return?

Condition (f) points to the due date in section 263(1)(c). That Table gives 31 July for "any other assessee" (Sl. No. 4), 31 October for a company or an assessee whose accounts must be audited (Sl. No. 2, where section 172 does not apply), and 31 August for a business-income assessee without audit (Sl. No. 3). Confirm which row fits your party's status. Section 263(1)(a)(iii) also says the return obligation is tested without giving effect to Schedule VIII (Table: Sl. No. 1), so the exempt income is counted when deciding whether a return is required.

What else must an electoral trust do under rule 289?

• Who it can take money from: citizens of India, companies registered in India, and firms, HUFs, AOPs and BOIs resident in India (rule 289(2)). It cannot accept money from foreign individuals or entities, Government companies, another section 8 company approved as an electoral trust, or any foreign source under FCRA (rule 289(6)).
• Receipts: issue a receipt immediately on each contribution with the contributor's name, address and PAN and the trust's own approval details (rule 289(5)), and take a receipt from the party it distributes to (rule 289(9)).
• Distributable amount: contributions plus brought-forward surplus, reduced by the management spending, are the distributable contributions; at least 95% of the gross contributions plus surplus must go out before 31 March (rule 289(8)).
• No self-dealing: contributions cannot be used for the benefit of members, their relatives, contributors or concerns in which they have a substantial interest (rule 289(10)).
• Filings: audit report in Form No. 181 to the DGIT (Systems) with the list of contributors and recipient parties, by the section 263(1)(c) return due date, filed electronically (rule 289(12), (13), (16)). A change in shareholders after approval must be intimated to the Board within 30 days (rule 289(17)).

Common mistakes

• Treating the exemption as automatic. It applies only when every condition for that year is met.
• Accepting a cash donation above Rs 2,000 because the donor is known to the party.
• Keeping donor records only for large cheques and skipping the name and address for other contributions above Rs 20,000.
• Forgetting the treasurer's report under section 29C(3) of the Representation of the People Act, 1951, which is a separate condition from the audit.
• Not filing the return, assuming exempt income means no return. Condition (f) requires it.
• For electoral trusts, counting only current-year donations and leaving out the brought-forward surplus when working out the 95%.

Quick reference

Item	Political party (Sl. No. 1)	Electoral trust (Sl. No. 2)
Eligible person	Party registered under section 29A, RP Act, 1951	Electoral trust
Income left out	House property, other sources, capital gains, voluntary contributions	Voluntary contributions
Key numbers	Rs 20,000 (record), Rs 2,000 (mode of receipt)	95% of donations plus brought-forward surplus
Return	Required, by the section 263(1)(c) due date	Not listed as a Schedule VIII condition
If conditions fail	That income is charged to tax for that tax year (section 12(2))

Where this is in the Act

• Section 12(1) to (3): income not included in total income of political parties and electoral trusts.
• Schedule VIII, Table Sl. No. 1 and 2, and the Note on "electoral bond".
• Section 263(1)(a)(iii), 263(2), 263(1)(c): return of income and due dates.
• Rule 289: functioning of an electoral trust.

For a CA who handles a party or trust as a client, the practical work is tracking the audit, the treasurer's report and the return date each year. Finexo's practice management software can hold those deadlines across your client list. It does not file returns or decide eligibility. For another post in this series, see TDS on rent under the Income Tax Act 2025.

This article is for information only. Check the current Act, Rules and notifications, or consult a professional, before relying on it.