Electoral Trust Rules 2026: Functioning, Compliance & Audit Under Rule 289 and Schedule IX

After the Supreme Court struck down the electoral bonds scheme in February 2024, electoral trusts have re-emerged as the primary transparent vehicle for channelling corporate and individual contributions to political parties. In FY 2023-24, electoral trusts received over Rs 1,200 crore in contributions, with the largest-Prudent Electoral Trust-distributing over Rs 1,000 crore to political parties across the spectrum.

Under the Income Tax Act, 2025 (effective 1 April 2026), the electoral trust framework is governed by Schedule IX (carrying forward the Section 13B exemption provisions) and Rule 289 of the Draft IT Rules, 2026 (replacing old Rule 17CA). The Electoral Trusts Scheme, 2013 continues to govern CBDT approval and registration. Rule 289 introduces Form 181 (replacing old Form 10BC) for audit reporting and mandates electronic filing with DSC/EVC.

This guide covers the legal framework, eligibility, contribution rules, distribution requirements, administrative expense limits, prohibited transactions, audit and reporting obligations, and donor tax benefits. For companies and individuals contributing to political parties through electoral trusts and managing income tax return filing (https://www.patronaccounting.com/income-tax-return), understanding both the trust’s compliance obligations and the donor’s deduction claims is essential.

What is an Electoral Trust?

An electoral trust is a company registered under Section 8 of the Companies Act, 2013 (formerly Section 25 of the Companies Act, 1956) that has been approved by CBDT under the Electoral Trusts Scheme, 2013. Its sole purpose is to receive voluntary contributions from permitted donors and distribute them to political parties registered under Section 29A of the Representation of the People Act, 1951.

Key characteristics:

• Legal form: Section 8 company (not-for-profit).
• Approval: Must be approved by CBDT. Application in Form A of the Electoral Trusts Scheme, 2013, filed with the jurisdictional Commissioner of Income Tax and copy to Member (IT), CBDT.
• Purpose: Exclusively to receive contributions and distribute to eligible political parties. No other business activity.
• Tax status: Contributions received are exempt under Section 13B, provided 95% distribution and Rule 289 compliance conditions are met.

As of 2024-25, there are approximately 18 registered electoral trusts in India, with Prudent Electoral Trust being the largest by volume. For entities registered through company registration (https://www.patronaccounting.com/private-limited-company-registration) as Section 8 companies, the electoral trust approval process requires CBDT clearance in addition to the Companies Act registration.

Rule 289: Complete Compliance Framework

Who Can Contribute?

Under Rule 289(2), the electoral trust may receive voluntary contributions from:

• Indian citizens (individuals)
• Companies registered in India (domestic companies)
• Firms or Hindu Undivided Families (HUFs) resident in India
• Associations of persons or bodies of individuals resident in India

Who Cannot Contribute?

Under Rule 289(4), the electoral trust shall not accept contributions from:

• Non-Indian citizens (foreign individuals)
• Foreign entities (whether incorporated or not)
• Other electoral trusts (approved under the same scheme)
• Government companies (as defined in Section 2(45) of the Companies Act, 2013)
• Foreign sources (as defined in Section 2(j) of the Foreign Contribution (Regulation) Act, 2010)

How Must Contributions Be Made?

• Mode: Only by account payee cheque, bank draft, or electronic transfer. Cash contributions are strictly prohibited.
• PAN/Passport mandatory: The contributor must provide PAN (if resident) or passport number (if an Indian citizen who is not resident). Contributions without PAN/passport are not accepted.
• Receipt: The trust must issue a receipt immediately upon receiving any contribution, indicating: name and address of contributor, PAN/passport number, amount, date, mode of payment, and PAN of the electoral trust.

The 95% Distribution Rule

This is the core compliance condition for tax exemption:

• Distributable amount: Total contributions received during the tax year + surplus brought forward from earlier years − amount spent on managing affairs (admin expenses).
• Distribution requirement: At least 95% of total contributions received (including brought-forward surplus) must be distributed to eligible political parties before 31 March of the tax year.
• Eligible political parties: Only political parties registered under Section 29A of the Representation of the People Act, 1951.
• Receipt from party: The trust must obtain a receipt from each political party indicating: name of the party, its PAN, registration number, amount received, date of receipt, and name/designation of the person signing the receipt.

Consequence of non-compliance: If the 95% distribution condition is not met, the exemption under Section 13B is lost, and the entire contribution received becomes taxable as income of the electoral trust.

Administrative Expense Cap

Administrative expenses cover salaries of trust staff, office rent, stationery, audit fees, filing fees, and other operational costs. The dual cap (percentage + absolute) means that even if a trust receives Rs 100 crore in contributions, its admin expenses cannot exceed Rs 3 lakh in any year after the first.

Prohibited Uses of Contributions

Under Rule 289(10), the electoral trust shall not utilise any contributions for the direct or indirect benefit of:

• Members of the trust
• Contributors to the trust
• Relatives of members or contributors (as defined under the Companies Act)
• Any concern in which any member or contributor has a substantial interest

This prohibition ensures that electoral trusts function purely as pass-through vehicles for political funding and do not become conduits for personal enrichment. For businesses using tax audit services (https://www.patronaccounting.com/tax-audit), the audit of an electoral trust specifically verifies these prohibited transaction conditions.

Audit and Reporting: Form 181

Under Rule 289(12)-(16), the electoral trust must:

1. Annual audit: Get accounts audited by a chartered accountant (as defined in the Explanation below Section 288(2) of the IT Act).
2. File Form 181: Submit the audit report in Form 181 (replacing old Form 10BC) along with annexures to the Director General of Income Tax (Systems) on or before the due date for furnishing the return of income under Section 263(1)(a)(iii).
3. Electronic filing: Form 181 must be filed electronically: (a) under DSC if the return of income is required under DSC, or (b) through EVC in other cases. This is a new requirement under Rule 289(13)-the old Rule 17CA did not mandate electronic filing.
4. Contributor and distribution lists: Furnish certified copies of the list of contributors and list of political parties (with amounts distributed) to the DGIT(Systems) annually along with the audit report.
5. Meeting records: Maintain a regular record of proceedings of all meetings and decisions taken therein.
6. Shareholding changes: Notify CBDT within 30 days of any change in shareholders subsequent to the CBDT approval.

For entities using professional accounting services (https://www.patronaccounting.com/accounting-services), the electoral trust audit is a specialised engagement requiring verification of the 95% distribution condition, admin expense cap compliance, prohibited transaction checks, and contributor/distribution list preparation.

Tax Benefits for Donors

Important: The deduction is available only if the contribution is made by a mode other than cash (cheque, bank draft, or electronic transfer). Cash contributions do not qualify for deduction under either section. After the Supreme Court struck down electoral bonds in February 2024, contributions through electoral trusts have become the primary route for companies seeking 80GGB deductions for political funding.

Old Framework vs New Framework

Common Mistakes to Avoid

Mistake 1: Not distributing 95% before 31 March. The distribution deadline is absolute. If the trust retains more than 5% (plus permissible admin expenses), the entire contribution becomes taxable. Plan distributions well before year-end.

Mistake 2: Accepting cash contributions. Cash contributions are prohibited. Even a single cash receipt violates Rule 289 and can jeopardise the trust’s exemption status.

Mistake 3: Accepting contributions without PAN/passport. Every contributor must provide PAN (resident) or passport number (NRI citizen). Contributions without identification are non-compliant.

Mistake 4: Filing Form 10BC instead of Form 181. From 1 April 2026, the old Form 10BC is replaced by Form 181 under Rule 289. Filing the wrong form will result in non-compliance with audit reporting requirements.

Mistake 5: Not intimating CBDT of shareholding changes. Any change in the trust’s shareholders must be notified to CBDT within 30 days. Failure to do so can result in revocation of the trust’s approved status.

Key Takeaways

Electoral trusts are CBDT-approved Section 8 companies that serve as transparent intermediaries for political funding. Under Rule 289 of the Draft IT Rules, 2026 (replacing old Rule 17CA), they must distribute at least 95% of contributions to eligible political parties before 31 March, maintain admin expenses within 5% (capped at Rs 3-5 lakh), accept contributions only through banking channels with PAN/passport, and file Form 181 electronically with DSC/EVC.

The exemption under Section 13B (Schedule IX of the 2025 Act) is conditional on strict compliance-any breach of the 95% distribution rule, donor restriction, or prohibited transaction condition results in the entire contribution becoming taxable income.

For corporate donors, contributions to electoral trusts qualify for 100% deduction under Section 80GGB (old regime only). For individual donors, Section 80GGC provides the same benefit. After the Supreme Court’s February 2024 decision striking down electoral bonds, electoral trusts have become the primary structured vehicle for transparent political contributions, making compliance with Rule 289 more important than ever.

Need Help with Electoral Trust Compliance?

Electoral trust compliance requires maintaining strict 95% distribution discipline, accurate contributor documentation with PAN/passport, admin expense tracking within the capped limits, annual audit in Form 181, electronic filing with DSC/EVC, and CBDT notification of any changes. The consequences of non-compliance are severe-loss of exemption means the entire contribution becomes taxable.

Explore our income tax compliance services (https://www.patronaccounting.com/income-tax-return) for electoral trust audit, Form 181 filing, contributor documentation review, and CBDT compliance advisory under the new Act.

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