Desperate families left homeless by August's widespread disorder will have their compensation docked because they accepted £2,500 each from Conservative Lord Harris of Peckham, he said.
Carpetright chief Lord Harris, whose store in Tottenham, north London, was burnt down on the first night of rioting which swept English cities, gave the money to families who lived above the shop and were forced to flee the flames.
But he said the Government would strip £2,500 from each compensation payout.
Lord Harris said he was "very, very surprised" to learn of the cash cut, adding: "Normally you can't claim money back from a charity."
The peer told BBC Radio 4 he still felt "very sad" for the families affected.
He added: "Many of them still haven't got any homes and we should be doing more to make sure they get homes as quickly as possible, because there's nothing they have done at all. They are being penalised for something the rioters did to them."
A spokesman for the Metropolitan Police Authority, which is responsible for payouts to London victims of rioting, said: "If a claimant for compensation under the Riot (Damages) Act 1886 has received a payment of any sort from another source, such as an insurance company, charity or local authority, in strict accordance with the Act this sum must be deducted from the claim against the Metropolitan Police Authority and the sum will be reimbursed to the third party.
"Following full compliance with the Act it is, of course, within the power of the original donor to repeat the original donation."
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