Can you claim tax deduction for electoral bonds bought before the SC verdict?

Impact of SC's electoral bonds judgment to be felt across all parties

The Supreme Court (SC) decision on electoral bonds has put hundreds of taxpayers who have used these instruments to make donations to political parties and claim tax deductions in a quandary.

The court on February 15 termed electoral bonds, which are essentially banking bearer instruments used to donate money to political parties, as unconstitutional due to the anonymity of the donors who take this route.

Donations to political parties in the financial year 2021-22 through this mode were in the excess of a whopping Rs 2,664 crore. This constituted 55.09 percent of overall retail donations.

Top takeaways from the SC verdict on electoral bonds

For taxpayers, the major concern now is to ascertain whether or not the 100 percent tax deduction on donations they might have made to political parties in 2023-24 would be available now. These deductions have to be claimed while filing tax returns before July 31, 2024.

Vaibhav Sankla, founder of global tax advisory Billion BaseCamp, says, “We will have to wait for CBDT (Central Board of Direct Taxes) to clarify whether the tax deductions can be claimed for the current financial year on bonds purchased prior to February 15, 2024.”

"For the FY 2023-24, the electoral bonds purchased by the Indian companies and individuals in the specified months of April 2023, July 2023, October 2023 and in January 2024, would have already been encashed by the respective political parties, as the validity period of 15 days has already expired for all these four specified months," says Mayank Mohanka, Founder Director at TaxAaram.

"Both the said SC judgements, prima-facie, will not impact the deduction claimed by the Indian companies, and individuals, u/s 80GGB and 80GGC respectively, for the FY 2023-24 relevant to the AY 2024-25. Also, no direction has been given in the SC judgement suggesting scrapping of deduction u/s 80GGB or 80GGC," Mohanka adds.

Clarification regarding these bonds will help one understand the legality of these instruments, which were introduced by the Narendra Modi-led government in 2018.

‘I-T returns ended anonymity’

But chartered accountants say that since the tax deduction claim in the income tax return (ITR) ended the anonymity in any case, it is likely that past deduction claims in previous years would not be disturbed since it does not run counter to the SC’s reasoning on anonymity.

I-T rules did not require taxpayers to mention the names of the political parties they had given money to in their income tax returns but taxpayers were required to produce the documents and permanent account number (PAN) of the recipient to claim the deduction under Section 80GGB/80GGC of the Income Tax Act, 1961, negating the anonymity factor.

“The lack of transparency ends the moment a person comes forward and claims the electoral bond purchase in the tax return for claiming the deduction. But it needs to be seen whether the tax deduction claimed for these bonds purchased this year (prior to the verdict) and even in earlier years remain unimpacted,” said Ameet Patel, partner at tax consultancy Manohar Chowdhry & Associates.

SBI to stop issuing electoral bonds ‘immediately’ after Supreme Court's judgement

Seek refund on donations

In the interim, you can head to the State Bank of India (the bank designated for issuing electoral bonds) branch where you may have purchased the bonds and seek a refund if you purchased them up to 15 days ago.

This is because once the donation amount is deposited with the State Bank of India, the electoral bond is handed over to the political party concerned, which needs to claim the money within 15 days. If they fail to do so within 15 days, the funds are transferred to the Prime Minister’s Relief Fund.

“But if you have purchased a bond, check for a refund. If one is not getting the money back and you have purchased it in good faith, then do claim the value of the bond purchased prior to the verdict in your tax returns as usually, such measures are applicable only prospectively,” suggested Sankla.

The case of refunds is tricky too as the Supreme Court has asked political parties to return the money. However, these bonds do not bear the name of the donor. Moreover, the tax deduction claims would fall flat if one claims a deduction for the amount and the political party has refunded the money based on the Supreme Court orders.

“While the fine print needs to be studied, if the bond has been encashed by a political party, it's fine. But where the bond has not been cashed, there is a dilemma on whether you can claim the tax deduction. Additionally, the refunds have to be issued by the political party. One needs to understand how the tax exemption will work in that case,” said Mayank Mohanka, a chartered accountant and partner, SM Mohanka and Associates.

Moneycontrol impact

While the furore over electoral bonds had been in the offing, Moneycontrol had raised the matter of these instruments being kept out of the budget announcements on February 1, 2024.