Section 12 of the Income-tax Act, 2025 — Exempt Income of Political Parties and Electoral Trusts

In plain language

What Section 12 says

Section 12 of the Income-tax Act, 2025 (effective 1 April 2026) is the single provision that tells us which incomes of a political party and an electoral trust are kept out of tax. In plain words, the section states that while computing the total income of any political party or electoral trust for a tax year, any income listed in Schedule VIII shall not be included — provided the conditions attached in that Schedule are satisfied. If those conditions are broken in any year, that particular income becomes fully taxable for that year.

This one section replaces two well-known provisions of the old Income-tax Act, 1961 — Section 13A (political parties) and Section 13B (electoral trusts). The 2025 Act moved the detailed "who, what and how" into Schedule VIII, keeping the operative section short.

Who it applies to

• Political parties registered under Section 29A of the Representation of the People Act, 1951. An unregistered outfit gets nothing.
• Electoral trusts approved by the Board (CBDT) whose job is to collect voluntary contributions and pass them on to registered political parties.

What income is exempt for a political party

• Voluntary contributions (donations) received from any person.
• Income from house property.
• Income from other sources (e.g. interest, membership fees).
• Capital gains.

Notably, income under the head "Profits and gains of business" is NOT exempt — a party running a commercial business pays normal tax on it.

Conditions a political party must satisfy

• Books of account: maintain records that let the Assessing Officer properly work out the income.
• Donor records above ₹20,000: keep the name and address of every person contributing more than ₹20,000 (except contributions received through electoral bonds).
• No large cash donations: a party must not accept a donation exceeding ₹2,000 in cash from any single person — it must come by cheque, bank draft, electronic transfer or electoral bond. Accepting bigger cash risks losing exemption on the whole contribution income.
• Audit: accounts must be audited by a Chartered Accountant.
• Report to the Election Commission: the treasurer must submit the contribution report (for donations above ₹20,000) to the ECI by the due date.
• File the return on time (the successor to Section 139(4B) filing obligation), using the form prescribed for such entities (equivalent of ITR-7).

Conditions an electoral trust must satisfy

• 95% distribution rule: the trust must distribute at least 95% of the total voluntary contributions received in the year (plus surplus brought forward) to registered political parties.
• Administrative expense cap: the remaining amount kept back for functioning is capped — broadly 5% of contributions, subject to ceilings (around ₹5,00,000 in the first year and ₹3,00,000 in later years, as per the electoral trust rules).
• Functioning as per rules (the Electoral Trust Rules; audit report now on the prescribed form, e.g. Form 181 under Rule 289).

How it interacts with related provisions

Section 12 sits alongside Section 11 (exemptions for registered charitable/religious trusts and institutions) in the exempt-income chapter. Donors who give to political parties or electoral trusts separately claim deductions under the successors to Section 80GGB/80GGC (contributions to political parties). The anti-abuse rule is built in: fail the conditions and the exemption collapses only for the defaulting income and year — not permanently.

Practical implications

• The ₹2,000 cash cap is the single most litigated condition; even one large cash donation can put the party's contribution income to tax at the maximum marginal rate.
• Late filing of the return is fatal — tribunals have repeatedly denied exemption purely for a missed deadline.
• Exemption is not automatic; it is earned every single year by compliance.