The murky world of political party finance

GS-II – Governance, Polity and Social Justice | Electoral Reforms | Political Parties | Funding of Elections

Why in News?

• Donations: Donations for six Registered Unrecognised Political Parties (RUPPs) were recently revealed as part of a BBC investigation.
• ADR Report: The income declared by the RUPPs increased by 223% in FY2022-23 as per a report by the Association for Democratic Reforms (ADR) published on July 18, 2025.
• Financial Records: Only 739 of the 2,764 RUPPs had submitted their financial record with Election Commission of India (ECI).
• ECI Drifts Out 334 RUPPs: As part of a “Plan” for Clean Up, on August 9, 2025, the ECI has mentioned that it has drifted out 334 RUPPs from total registered voters.

Political Parties and Constitutional Status

• Political Parties: Political parties have no mention in the Constitution except for the Tenth Schedule of the Constitution.
• Article 19: They are existent “in the nature of associations” in exercise of rights which fundamental right under Article 19.
• Classification: No attempt has been made to classify their structure as a company, trust, society, firm or not-for-profit.
• Income-Tax Exemption: Political parties are still entitled to a blanket income-tax exemption, and have often turned into beacons for illicit wealth.

Registered Unrecognised Political Parties (RUPPs)

• Section 29A of RPA 1951: Provides for the registration of political parties.
• Section 29B, RPA 1951: Only RUPPs are qualified to make contributions.
• Tax Treatment: The tax treatment of them is governed under Section 13A, Income-Tax Act.
• Recognition: As per Order 6 of the Election Symbols (Reservation and Allotment) Order, 1968 which provides for the classification into recognised and unrecognised political parties for purposes of allotment of symbols.
• Danger of De-Registration: ‘In to out’ through delisting does not amount to deregistration because the ECI lacks power to generally deregister political parties.
• ECI Guidelines: Automatically removed from the list of recognised parties if a party does not contest elections continuously for six years.

Role of T.N. Seshan

• 1994 Order: In an order dated October 16, 1994, CEC T.N. Seshan pointed out the degree of “adhocism” and the “sorry state of affairs” in political parties.
• Internal Functioning: He noticed that he had not seen a party which is running its affairs according to its constitution or the rules and regulations.
• ECI Reaction: He warned political parties, saying that the ECI would not remain a “mute spectator” and instead put them on “notice” to get their house in order.
• Order 16A: T.N. Seshan also came to introduce Order 16A in Symbols Order.
• Power: It gives power to ECI to suspend or withdraw recognition of a recognised political party for failure to comply with the provisions of the MCC or lawful directives and orders of Commission.

Scale of Political Wealth

• 22 Political Parties: Had ₹18,742.31 crore total funds available for the 2024 general election.
• Donations: The aggregate sum raised through donations between the declaration of the race and its finish remains at ₹7,416.31 crore.
• ₹14,848.46 crore: Balance these parties maintained with them after poll.
• ₹3,861.57 crore: Total expenses incurred for elections in the relevant time of campaigning.
• Tax Loss: Amount of taxes that the exchequer claim it lost over the last 10 years due to exemptions for political donations: ₹11,813 crore.
• FY2022-23: Individuals were responsible for ₹2,275.85 crore of claimed exemptions compared to corporates at ₹514.4 crore and others including firms and associations at ₹115.71 crore.
• Donations Declared: From ₹714 crore by 43 parties in 2015-16 to ₹7,203 crore by 27 parties in 2023-24.
• Claim of Tax Exemptions: Only ₹11,779 crore, or just 41.76% of total donations amounting to ₹28,287 crore across nine years were claimed as tax exempt.

Electoral Bonds and Political Funding

• Electoral Bonds: A secretive vehicle for political funding, they were introduced in 2018.
• Supreme Court: The Supreme Court had overruled the scheme in 2024.
• RUPPs: Since only those parties that had received at least 1% of the votes in the most recent Lok Sabha or State Legislative Assembly elections were eligible for electoral bonds, most RUPPs were not able to receive them.
• Donation Details: The wording of the donation details has led to unanswered questions as to who made these donations and why.

Concerns Regarding Transparency and Accountability

• RTI: Political parties from providing information under the provision of the Right to Information (RTI) Act, as upheld by a 2013 Central Information Commission (CIC) order.
• Financial Oversight: ECI has been scolded for mechanically accepting financial accounts of political parties.
• Concerns: The Income-Tax Department and the Enforcement Directorate are also keeping an eye at some political party accounts.
• RUPPs: There are a number of ‘insignificant’ RUPPs that are registered parties, but which merely collect large donations and do not fairly participate in the political process (or even stand candidates).
• Administrative Expenses: There are questions over whether these so-called “shell” parties should be permitted to incur crores in administrative expenses.
• Exemption from Tax: Uncertain whether donations to parties which were removed continued be exempted.

Constitutional and Legal Concerns

• Article 19: Political parties are an association in the service of fundamental rights.
• Article 324: Provides the ECI with constitutional authority over elections.
• Section 29A: Registration of political parties.
• Section 29B of RPA 1951: Contributions to political parties.
• Section 13A, Income-Tax Act: Tax treatment for political parties.
• Election Symbols (Reservation and Allotment) Order, 1968: Covers the recognition and allotment of symbols.
• Order 16A: Similar to the above allows ECI to suspend or withdraw recognition for breaching MCC or disregarding any Order of the ECI made in accordance with law.
• Kanhiya Lal Omar v. R.K. Trivedi and Others: Article 324 was described by the Court as a “reservoir of authority” for the ECI.

Way Forward

• Court-Monitored Investigation: The Court should direct a court-monitored investigation into electoral bonds and purported quid pro quo.
• RUPP Structure: Explore the common phenomenon of firms RUPPs collecting and distributing large sums of donations relatively low engagement in elections.
• Audit of Accounts: Article 324 empowers the ECI to direct political parties to get their accounts audited by Controller and Auditor General of India or its nominee.
• Election Expenditure Limit: The ECI needs to step in and put a cap on how much political parties can spend during elections.
• Tax Exemption: Tax exemption on donations should be restricted as per the expenditure limit allowed. Donations that supplement parties should be uniformly taxed.
• Deregistration: The ECI should create an automated mechanism to deregister RUPPs that do not participate in elections as per its rules.
• Centralised Digital Portal: Create a centralised digital portal in which all registered parties are required to add and upload their financial data in standardized formats.

Conclusion

• Increased Transparency in Political Funding
• Institutional Accountability: ECI and other institutions must ensure that political finance is transparent.
• Electoral Environment: The electoral system needs again to build mechanisms in order to deal with sponsors of political causes, and aspects regarding RUPPs.
• Reclaiming Democratic Participation: We the People need to keep claiming our place in the democracy.

UPSC Mains Practice Question

Q. What have been done to increase transparency/reduce abuse by Registered Unrecognised Political Parties (RUPPs) in political funding and functioning? Look at the legal and institutional issues.