Political Funding Reforms in India

Key Highlights of the ADR Report on Political Funding (FY 2024–25)

• Massive Funding Surge: Total declared donations (above ₹20,000) to national parties rose by 161% to ₹6,648 crore, up from ₹2,547 crore in FY 2023–24.
• BJP Dominance: The Bharatiya Janata Party (BJP) received ₹6,074 crore, accounting for over 91% of total aggregate funding.
• Corporate Funding Dominance: Corporates contributed 92.18% of total donations; individuals accounted for only 7.61%.
• Role of Electoral Trusts: The Prudent Electoral Trust emerged as the largest donor, contributing ₹2,413 crore collectively to BJP, INC, and AAP—majority going to BJP.
• Geographic Concentration: Highest donations came from Delhi, followed by Maharashtra and Gujarat.
• Zero-Declaration Trend: The Bahujan Samaj Party (BSP) declared zero donations above ₹20,000 for the 19th consecutive year.

What is Political Funding?

Political funding refers to the financial resources raised by political parties for:

• Election campaigns
• Operational costs
• Party activities

Primary Sources of Political Funding in India

1. Individual Donations

• Donations above ₹2,000 must be made via non-cash modes (cheque/digital).
• Below ₹2,000 can be in cash and remain anonymous.

1. Corporate Funding

• Governed by Section 182 of the Companies Act, 2013.
• Companies must disclose total amount and recipient party in their Profit & Loss Account.
• No cap on donations since Finance Act 2017 removed the earlier 7.5% of average net profit limit.
• Government companies are prohibited from donating.

1. Electoral Trusts

• Intermediaries that collect funds from corporates/individuals and distribute to parties.
• Must distribute 95% of annual income to registered parties; retain only 5% for admin costs.
• Transactions must be non-cash.

1. Public/State Funding

• India does not have direct state funding of elections.
• Only indirect state support exists:
• Free airtime on Doordarshan and All India Radio
• Subsidized land for party offices
• Free supply of electoral rolls

1. Transparency Requirements

• Section 29C, RPA 1951: Parties must submit annual contribution reports to ECI for donations above ₹20,000 to claim tax exemption under Section 13A, Income Tax Act.
• Failure to file disqualifies parties from tax benefits.

Statutory Provisions on Political Donations

| Representation of the People Act, 1951 | | Section 29A | Mandates registration of political parties with ECI for eligibility to receive donations and tax exemptions. | | Section 29B | Allows parties to accept voluntary contributions from any person/company except government companies and foreign sources. | | Income Tax Act, 1961 | | Section 13A | Grants 100% tax exemption to registered parties on voluntary contributions, house property income, and capital gains. | | Section 80GGC (Individuals) / 80GGB (Companies) | Allows 100% deduction for donations to registered parties or electoral trusts, provided payment is not in cash. | | Companies Act, 2013 | | Section 182 | Requires companies (in existence for >3 years) to disclose political contributions in P&L account. Removed 7.5% cap via Finance Act 2017. | | FCRA, 2010 | | Section 3 | Prohibits political parties, candidates, and MPs from accepting foreign contributions. | | FEMA & FDI Policy | | Finance Act 2016 & 2018 | Retrospectively amended FCRA: An Indian company is not a foreign source even if >50% foreign-owned, if it complies with sectoral FDI caps under FEMA. |

Evolution of Political Funding Landscape

Pre-2017 Era

• Informal system with cash donations dominating.
• Reporting threshold: ₹20,000.
• Large donations often split into smaller chunks to avoid disclosure.
• Corporate cap: 7.5% of average net profit (removed in 2017).

Electoral Bond Era (2018–2024)

• Introduced via Finance Act 2017.
• Donors could buy bonds from SBI anonymously.
• Parties could encash bonds in designated bank accounts.
• Pros: Reduced black money; formalized flow.
• Cons: No public disclosure; created information asymmetry.

Supreme Court Judgment (2024)

• Case: Association for Democratic Reforms & Anr. v. Union of India & Ors (2024)
• Ruling: Struck down Electoral Bond Scheme as unconstitutional.
• Reasons:
• Violates Article 19(1)(a) — Right to Information.
• Enables institutionalized corruption.
• Undermines democratic accountability.

Current Landscape (2025–2026)

1. Electoral Trusts – Major conduit for corporate funding.
2. Direct Donations – Via cheques/digital transfers (non-cash).
3. Integrated Election Management System (IEMS) – ECI mandates online filing of contribution reports for faster auditing.

Why Financial Transparency Ensures Democratic Accountability?

1. Prevents Quid Pro Quo

• Transparent funding deters policy favoritism in exchange for donations.

1. Ensures Level Playing Field

• Prevents financial arms race; smaller parties can compete ideologically.

1. Protects National Sovereignty

• FCRA enforcement blocks foreign influence in domestic politics.

1. Empowers Informed Voters

• Voters can assess candidate-party-donor nexus before voting.

1. Constitutional Basis

• SC emphasized that right to know is part of freedom of speech and expression (Article 19(1)(a)).

Key Committees on Political Funding

Essential Reforms for Transparent Political Funding

1. Lower Disclosure Threshold

• Reduce from ₹20,000 to ₹2,000 to prevent donation splitting.

1. State Funding (In-Kind)

• Adopt Indrajit Gupta model: free media time, fuel, paper, office space.
• Alternative: Central Electoral Trust with blind donations, distributed based on vote share.

1. Cap on Party Expenditure

• No legal limit currently on party spending.
• Introduce aggregate expenditure cap per election cycle.

1. Independent Auditing

• Replace self-appointed auditors with CAG/ECI-approved panel.

1. Decouple Corporate Influence

• Reintroduce 7.5% cap on corporate donations.
• Mandate shareholder approval at AGM for political contributions.
• Crack down on shell companies used for money laundering.

1. Empower ECI

• Grant ECI power to de-register parties for non-compliance with funding norms.
• Strengthen monitoring of IEMS filings and audit enforcement.

Conclusion

The ADR report highlights growing corporate dominance and asymmetry in political funding. While the SC’s electoral bond verdict was a step toward transparency, structural reforms—including expenditure caps, lower disclosure thresholds, and ECI empowerment—are vital to ensure democratic accountability, level playing field, and public trust in India’s electoral process.