The close of the fiscal year usually makes you wish for tax-free bonds. But the Budget this year has introduced a new way for citizens to bond with their favourite political party. Electoral Bonds, which neither get you a tax exemption nor earn you interest, have been proposed as a way of reforming election funding.

What is it?

Electoral bonds will be issued by a notified bank for specified denominations. If you are keen to donate to a political party, you can buy these bonds by making payments digitally or through cheque. You are then free to gift the bond to a registered political party. The bonds will likely be bearer bonds and the identity of the donor will not be known to the receiver.

The party can can convert these bonds back into money via their bank accounts. The bank account used must be the one notified to the Election Commission and the bonds may have to be redeemed within a prescribed time period.

But this does not sound like a bond, you say? What’s the principal and where’s the interest? The electoral bond is more like a bail-bond than a Government or corporate bond. Electoral bonds are essentially like bearer cheques. The issuing bank will remain the custodian of the donor’s funds until the political party redeems the bond. So, only the RBI will most likely be allowed to issue these bonds, to be sold through notified banks.

Why is it important?

Today, most political parties use the lax regime on donations to accept cash donations from anonymous sources. Nearly 70 per cent of the ₹11,300 crore in party funding over an 11-year period came from unknown sources, according to the Association for Democratic Reforms (ADR).

Currently, political parties are required to report any donation of over ₹20,000 to the IT department. But there has been a trend of more donations flowing by way of hard cash in smaller amounts. To fix this, the Budget has reduced the disclosure limit to ₹2,000 and insists that any amount over this must be paid through cheque or the digital mode. The idea is that electoral bonds will prompt donors to take the banking route to donate, with their identity captured by the issuing authority.

But there are loopholes to electoral bonds too. While the identity of the donor is captured, it is not revealed to the party or public. So transparency is not enhanced for the voter.

Why should I care?

If you want to play an anonymous benefactor to a political party, electoral bonds are a neat vehicle. But do note that income tax breaks may not be available for donations through electoral bonds. So if you are keen to support a political party, chances are you will have to choose between remaining anonymous and saving on taxes. Also, in the electoral bond route, while the party may not know the identity of the donor, the bank will.

But there do not seem to be many precedents to such a bond in other countries, even where political funding is well evolved. It may have been worthwhile to study alternate methods and ensure the process leads to more accountability for voters, before shaking things up.

All this said, nothing is going to change in a hurry. Even if the decks are cleared, electoral bonds will need amendments made to the RBI Act. We know how long getting the Act together takes!

The bottomline

The electoral bond can’t do a James Bond act and end political funding evils. Voters must band and demand better disclosures.

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