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Note on Electoral Trust

With an object to reform the system of funding to political parties , the Finance Act (No. 2), 2009 introduced a set of provisions (Section 13B) for the electoral trust under the Income Tax Act, 1961 (the Act).

Section 13B of the Act provides that any voluntary contribution received by an electoral trust (ET) shall not be included in the total income of  the Previous Year of such ET, if following conditions are satisfied:-

a. The ET is approved by CBDT in accordance with the scheme made by Central Govt.

b. The ET will have to distribute to political parties 95 percent of the aggregate donations received by it during the previous year along with the surplus, if any, brought forward from any earlier previous year.

c. The ET functions in accordance with the rules made in this regard by the Central Govt.

The Schemes and the Rules of Electoral trust have now been notified by the Central govt. vide Notification No. 08/2013 and 09/2013 dated 31.01.2013.

Eligibility of Electoral Trust:

A Company registered under section 25 of the companies Act, 1956 shall be eligible to make an application for approval as an ET after satisfying the following condition:

a. The company is registered on or after the 1 April 2012.

b. The name of the company shall include the phrase ‘ET’

c. The sole object of the ET is to distribute the contributions received by it to the political party, registered under section 29A of the representation of the people Act, 1951.

d. The ET shall have permanent account number (PAN)

Criteria for approval of Electoral Trust:

An ET shall be considered for approval if it fulfils all the following conditions:

a. The company is registered under the companies Act, 1956, which satisfies all the prescribed conditions.

b. The object of the ET shall not be to earn any profit or pass any direct or indirect benefit to its member or contributors, or to any  specified persons.

c. It has made adequate arrangement for recording the receipts from the contributors.

d. Application (in Form A) for approval of an ET under the ET Scheme, 2013.

Procedure for Approval:

· The application for approval needs to be made to the Commissioner of Income- Tax (CIT) or the director of Income-Tax (DIT) in Form A on or before 31 July of financial year for which the approval is sought.

· Copy of application along with acknowledgment receipt of submission of such application shall be send to the CBDT.

· Approval or rejection shall be given within six months form the receipt of the application by CIT/DIT. Further this period will not include the period from the intimation of defect by CIT/DIT to the removal of the defect by the applicant.

· The application shall be valid for that financial year only for which the application is sought and for a further period, not exceeding three assessment years, as may be specified in such approval.

· The detail procedure of obtaining CBDT approval is given in Annexure 1.

Rules for Functioning of Electoral Trust:

The government has also notified rules for functioning of ET. To avail exemption for contribution received and distributed, it is mandatory to fulfil conditions prescribed under the rules.

The rules prescribed condition with respect to permitted contributions and utilization of such contributions. It also prescribes documentation, audit and reporting requirement for ET. These rules are given as follows:

1. The ET to receive contributions from various entities viz. Individuals being citizens; Companies registered in India; a firm, Hindu Undivided family or an association of person / body of individuals resident in India.

2. The acknowledgement to be issued indicating amongst other things, the PAN or Passport No. of the contributor and PAN of the ET. Contributor does not hold a PAN and the citizen does not hold a passport no.

3. The ET prohibited from accepting contribution from foreign citizens; foreign entities; Other ET approved as such.

4. Contribution shall be accepted only by account payee cheque/bank draft or by electronic transfer.

5. The ET may spend up to 5% of the total contributions received in a year subject to an aggregate limit of INR 0.5 million in the first year of incorporation and INR 0.3 million in the subsequent years.

6. The ET shall distribute at least 95 % of the contribution received during the financial year along with surplus brought forward from earlier financial year.

7. The ET shall not utilize any contribution for the direct or indirect benefit of:

a) member of the ET.

b) Contributor

c) relative of such member,

d) member of an HUF in case the member / contributor is an HUF and,

e) and concern in which member/contributor has substantial interest.

8. The ET shall maintain such books of accounts and other document as may be required to enable computation of the total income under the act. The ET shall also maintain list of contributors, list of beneficiaries to whom the distribution has been made containing the prescribed details along with PAN amongst other things.

9. The ET shall also maintain a regular record of proceeding of all meeting and decision taken therein.

10.The ET shall get the account audited and submit the audit report in the prescribed particulars with the due date specified for furnishing the return of income. The certified list of contributors and political parties to whom the distribution is made shall be submitted along with the audit report.

11. Any change in the shareholding shall be intimated of the CBDT within 30 Days of such change.        


Published by

Gaurav Jain
Category Income Tax   Report

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