The cash has been found at the residence and office of BJP MLA Madal Virupakshappa's son, Prashanth, who worked as chief accountant at the Bengaluru Water Supply and Sewerage Board (BWSSB).
Besides Prashanth, authorities have arrested five other people associated with the case.
Madal Virupakshappa is a BJP MLA from Channagiri in the Davanagere district. He is the chairman of the state-owned Karnataka Soaps and Detergents Limited (KSDL), which makes the renowned Mysore Sandal Soap.
"The anti-corruption branch of Lokayukta yesterday caught Prashanth Madal, son of BJP MLA Madal Virupakshappa, taking a bribe of Rs 40 lakh. Over ₹ 1.7 crore in cash was recovered from his office," the Karnataka Lokayukta said.
The anti-corruption branch received information about Prashanth Madal that he demanded an Rs 81-lakh payoff from a contractor for a deal for raw materials needed to manufacture soap and other detergents, reported NDTV.
Speaking about the matter, Karnataka Chief Minister Basavaraj Bommai said that the ombudsman would conduct an independent investigation into the case. He also attacked the Congress.
He said, "We have re-established Lokayukta to curb corruption. During the Congress regime, with Lokayukta dissolved, many cases were closed. We will investigate the cases which were closed. Lokayukta is an independent institution and our stand is clear. The institution will investigate independently and we will not interfere in it."
The opposition has accused Mr Bommai's administration of corruption. Commenting on the matter, Congress leader Randeep Singh Surjewala said, "The loot of #40PercentSarkara continues unabated... caught red-handed taking ₹ 40 lakh bribe, Now ₹ crore recovered from BJP MLA's son's house. Father chairman, son takes money! Cozy Corrupt nexus of BJP!"