Political funding in India refers to the money that parties and candidates raise and spend to contest elections and sustain their organisations between polls. It involves membership fees, individual donations, corporate contributions, electoral trusts and, between 2018 and 2024, a controversial instrument known as electoral bonds. Because campaigns in a country of this size are expensive, the way parties finance themselves has been a constant subject of legal reform, judicial scrutiny and public debate.
The central difficulty is a balance between two goals: allowing parties to raise the resources they need to function in a competitive democracy, and ensuring that voters can know who is funding whom. This article explains the legal framework, the major instruments of funding, the 2024 Supreme Court verdict on electoral bonds, the cash-donation rules, the debate on state funding and the transparency measures that apply to parties today.
Quick Facts
| Feature | Details |
|---|---|
| Key laws | Representation of the People Act, 1951; Income-tax Act, 1961; Companies Act, 2013; Foreign Contribution (Regulation) Act, 2010 |
| Disclosure threshold | Contributions above Rs 20,000 from a single source must be reported to the Election Commission (Section 29C) |
| Cash donation limit | Since 2017, parties cannot receive cash donations above Rs 2,000 and retain tax exemption |
| Electoral bonds scheme | Notified on 2 January 2018 |
| Struck down | 15 February 2024, by a five-judge Constitution Bench of the Supreme Court |
| Electoral trusts | Scheme notified in 2013; must distribute most of their income to parties |
| Corporate donations | Banned in 1969, permitted again in 1985 |
| Tax treatment | Income of recognised parties exempt under Section 13A, subject to conditions |
| Foreign donations | Prohibited under the FCRA |
Why Political Parties Need Money
Running an election in India involves reaching a large and geographically dispersed electorate. Parties spend on rallies, travel, advertising, polling agents, printing, communication technology and the day-to-day work of maintaining offices and cadres. Outside election season, parties must also fund research, outreach and administration. As electorates have grown and media options multiplied, expenditure has risen steadily.
The law treats spending by candidates and by parties very differently. Candidates must stay within a ceiling fixed under the Conduct of Elections Rules, 1961, which is revised from time to time and varies between States and between Lok Sabha and Assembly contests. There is, however, no cap on what a political party may spend on campaigning. Under an Explanation to Section 77 of the Representation of the People Act, 1951, expenditure incurred by a party or its supporters on behalf of a candidate, other than by the candidate or the election agent, is not counted towards the candidate’s limit. This gap between the limits imposed on candidates and the freedom granted to parties is a long-standing point of criticism.
Sources of Party Income
Parties draw their funds from several sources, some visible and some less so. Broadly, they fall into the following categories:
- Membership fees and levies: small regular payments from members, and levies on elected representatives who hold office on the party’s ticket.
- Individual donations: contributions from supporters, which may be made by cheque, bank transfer or digital payment, and in small amounts in cash.
- Corporate donations: payments by companies, directly or through electoral trusts.
- Sale of publications and coupons: fundraising through party literature, souvenirs and coupons sold at events.
- Crowdfunding and digital contributions: online appeals that have grown with the spread of digital payments.
- Interest and other income: returns on bank deposits and property owned by the party.
Parties are required to file annual contribution reports and audited accounts with the Election Commission of India. Yet a significant portion of party income, in several analyses by civil society groups, has been reported under heads where the donor cannot be identified, which has kept the debate on transparency alive.
Corporate Donations: A Shifting Legal Position
The legal stance towards company donations has changed more than once. Under the Companies Act, 1956, companies could contribute to parties within limits. In 1969, the government of the day amended the law to ban corporate donations altogether, on the argument that business money was distorting politics. The ban was widely believed to have pushed contributions underground, and the Companies (Amendment) Act, 1985 restored the right of companies to donate, subject to a ceiling and a requirement to disclose the amount in the company’s profit and loss account.
The Companies Act, 2013 position
Section 182 of the Companies Act, 2013 originally allowed a company to donate up to 7.5 per cent of its average net profits of the three preceding financial years. It required board approval and disclosure of the party-wise amounts. Amendments introduced through the Finance Act, 2017 removed the percentage cap and the need to disclose the names of recipient parties, replacing it with disclosure of the total amount. A company also no longer needed to have existed for three years before making a contribution.
Tax treatment of donors
- Companies can claim a deduction under Section 80GGB of the Income-tax Act for contributions to registered parties.
- Individuals can claim a deduction under Section 80GGC, provided the payment is not made in cash.
- These deductions are meant to encourage transparent, traceable giving.
The Rs 20,000 Disclosure Rule and the Cash Cap
Two numbers are often confused in discussions on political funding. The first is the disclosure threshold of Rs 20,000. Under Section 29C of the Representation of the People Act, 1951, the treasurer of a political party must report to the Election Commission all donations received from any person or company above Rs 20,000 in a financial year. Contributions below this level do not need to be itemised, which in the past allowed large sums to be shown as numerous small, anonymous donations.
The second number concerns cash. Until 2017, a party could receive anonymous cash contributions of up to Rs 20,000 from a single source. The Finance Act, 2017 amended Section 13A of the Income-tax Act so that a party loses its tax exemption on income if it receives a donation in cash of more than Rs 2,000 from a single source. Donations above that amount must be received by cheque, bank transfer or another electronic mode.
| Rule | Amount | Effect |
|---|---|---|
| Disclosure to the Election Commission | Above Rs 20,000 per donor per year | Name and address of the donor must be reported |
| Cash receipts | Above Rs 2,000 from a single source | Not permitted for a party claiming tax exemption |
| Company contribution disclosure | Aggregate amount | Reported in the company’s accounts |
Electoral Trusts
An electoral trust is a non-profit entity formed to receive contributions from individuals and companies and to distribute them to political parties. The Electoral Trusts Scheme, 2013, framed under the Income-tax Act, laid down the rules for such trusts. The aim was to channel donations through a regulated route in which the trust files reports on who contributed and which parties received funds.
Key rules
- A trust must be approved by the Central Board of Direct Taxes and must register as a company not for profit under the Companies Act.
- It is required to distribute at least 95 per cent of the total income it receives in a year to eligible political parties.
- Contributions must be accepted through banking channels, and the trust must keep records of donors and recipients.
- The trust files its contribution report with the Election Commission, which makes the information public.
Electoral trusts have been regarded as relatively more transparent than anonymous instruments, because the names of donors and recipients are disclosed, though a donor can choose to give to the trust without specifying which party will receive the amount.
Electoral Bonds: The 2018 Scheme
The Electoral Bond Scheme was announced in the Union Budget speech of 2017 and implemented through the Finance Act, 2017, which amended the Reserve Bank of India Act, the Representation of the People Act, the Income-tax Act and the Companies Act. The scheme itself was notified on 2 January 2018. The government said its purpose was to cleanse political funding by encouraging donors to use banking channels rather than cash.
How the bonds worked
- Bonds were sold by authorised branches of the State Bank of India in denominations ranging from Rs 1,000 to Rs 1 crore.
- They were bearer instruments, payable on demand to the bearer, and did not carry the name of the buyer or the recipient.
- They were valid for 15 days from the date of issue and could be encashed only into the bank account of an eligible party.
- Eligible parties were those registered under Section 29A that had secured at least one per cent of the votes polled in the last Lok Sabha or State Assembly election.
- Parties were exempt from reporting the donors of electoral bonds in their contribution reports under Section 29C.
Supporters argued that the scheme protected donors from victimisation and brought money into the banking system. Critics argued that it hid the identity of donors from the public, while the identity could be known to the bank, and so to the government of the day, creating an asymmetry of information.
The 2024 Supreme Court Judgment
The scheme was challenged by petitioners including the Association for Democratic Reforms, the Communist Party of India (Marxist) and others. On 15 February 2024, a five-judge Constitution Bench headed by the then Chief Justice of India delivered a unanimous verdict in Association for Democratic Reforms v. Union of India declaring the Electoral Bond Scheme unconstitutional.
Key findings
- The anonymity of electoral bonds violated the citizen’s right to information under Article 19(1)(a), because voters need information on funding to make informed choices.
- The Court held that political contributions can give a donor access to policymakers, and the possibility of a quid pro quo cannot be ruled out, so transparency is an essential safeguard.
- It struck down the amendment to Section 182 of the Companies Act that had removed the limit on corporate donations, treating unlimited company contributions as arbitrary.
- It struck down the related amendments to the Representation of the People Act and the Income-tax Act that had exempted bond donations from disclosure.
The Court directed the State Bank of India to stop issuing electoral bonds and to submit details of the bonds purchased and encashed to the Election Commission, which was asked to publish the information. The data was subsequently placed in the public domain, and it is available as a record of that period of party funding.
Foreign Money and Other Restrictions
Parties are barred from receiving contributions from foreign sources under the Foreign Contribution (Regulation) Act, 2010, which replaced an earlier 1976 law. The concept of a foreign source has been refined through amendments, including changes to the definition of a foreign company, and the question of past funding from companies with foreign shareholding has been debated in courts and legislative amendments.
Other rules that apply to parties
- Government companies and bodies are not permitted to donate to political parties.
- Parties must maintain books of accounts and have them audited by a chartered accountant.
- Annual audited accounts and contribution reports must be filed within prescribed timelines, and failure can lead to loss of tax exemption.
- Candidates must keep a separate bank account for election expenses and file their expenditure accounts after the results.
The Central Information Commission held in 2013 that major national parties should be treated as public authorities under the Right to Information Act, 2005, but the parties contested this, and the matter has remained unresolved in practice and in the courts.
State Funding of Elections: The Debate
Many reform committees have asked whether the state should meet part of the cost of elections. The idea is that if parties and candidates receive public money, they will be less dependent on private donors. Several committees have examined it, including the Dinesh Goswami Committee on electoral reforms (1990), the Indrajit Gupta Committee on state funding of elections (1998), the Law Commission of India in its 170th Report (1999) and its 255th Report (2015), and the Second Administrative Reforms Commission.
Arguments in favour
- It could reduce the influence of wealthy donors and corporate interests.
- It might help candidates with limited means to contest.
- It would make it easier to enforce spending limits and audits.
Arguments against
- It places a burden on public finances in a country with competing development needs.
- Parties could continue to raise and spend private money in addition to state funds, defeating the purpose.
- Deciding which parties are eligible and how much each should receive is difficult.
The Indrajit Gupta Committee favoured partial state funding in kind to recognised national and State parties, and some indirect support already exists, such as free broadcast time on public broadcasters and free copies of electoral rolls for recognised parties.
Transparency and Reform Proposals
Since the 2024 verdict, discussion on political funding has centred on how to design a system that is both accountable and workable. Several measures are repeatedly proposed by academics, election-monitoring groups and expert committees.
- Lower the threshold for disclosing donors and publish donation data in a searchable, standard format.
- Require parties to file audited accounts on time, with penalties for non-compliance, including a stronger power for the Election Commission to act against non-compliant parties.
- Put a ceiling on party expenditure during elections, in addition to the existing limits for candidates.
- Encourage donations through banking and digital channels, including the electoral trust route.
- Bring internal party democracy and financial management under clearer norms.
- Consider limited public funding linked to performance and compliance.
The core question that remains is how far the voter’s right to know should extend into the details of private giving, and how to protect donors from retaliation while preventing secret influence over public policy.
Conclusion
Political funding in India has moved through cycles of restriction and relaxation, from the ban on corporate giving in 1969 to the electoral bonds of 2018 and the Supreme Court’s decision in 2024. The central lesson of this history is that funding rules shape not just party finances but the quality of democratic accountability. As the law continues to evolve, the shared objective remains a system in which parties can raise the money they need, voters can see where it comes from, and elections are decided by ideas and performance rather than by access to resources.
Frequently Asked Questions
What were electoral bonds?
Electoral bonds were bearer instruments sold by the State Bank of India that allowed individuals and companies to donate to eligible political parties without their names appearing on the bond. The scheme was notified on 2 January 2018 and was in operation until the Supreme Court struck it down.
Why did the Supreme Court strike down electoral bonds?
On 15 February 2024, a Constitution Bench held that the anonymity of donors violated the voters’ right to information under Article 19(1)(a). It also struck down the removal of the cap on corporate donations in the Companies Act and directed the State Bank of India to disclose details of the bonds to the Election Commission.
What is the Rs 20,000 rule in political donations?
Under Section 29C of the Representation of the People Act, 1951, parties must report to the Election Commission all donations above Rs 20,000 from a single source in a year, along with the donor’s details. Separately, since 2017 a party cannot accept cash donations above Rs 2,000 from one source if it wants to retain its income-tax exemption.
What is an electoral trust?
An electoral trust is a registered non-profit entity that receives contributions from individuals and companies and passes them on to political parties. Under the 2013 scheme, it must distribute at least 95 per cent of its income to parties and must file reports with the Election Commission naming donors and recipients.
Can companies donate to political parties in India?
Yes. Companies were barred from donating in 1969 but were allowed again from 1985. Under the Companies Act, 2013, they can donate with board approval and disclosure of the total amount, and government companies are not permitted to do so. The 2024 judgment struck down the removal of the earlier profit-based cap.
Is there state funding of elections in India?
There is no direct state funding of parties or candidates for campaign expenses. Some indirect support exists, such as free airtime on public broadcasters and free electoral roll copies. Several committees have recommended full or partial state funding, but it has not been adopted.
