SCHEDULE III INCOME NOT TO BE INCLUDED IN TOTAL INCOME OF ELIGIBLE PERSONS

Income-tax Act, 2025

At a Glance

This SCHEDULE III (Income Tax Bill, 2025 - Old Version) lists categories of income that are excluded from the total income of specified eligible persons (see "See section 11"). It matters because it delineates targeted tax exclusions that affect individuals, associations, funds, public bodies and specific sectors (tea, rubber, khadi, securitisation, investor protection funds, strategic petroleum reserves etc.). The Schedule operates by reference to conditions and statutory notes; the effective date or enactment date is Not stated in the document.

Background & Scope

Statutory hooks: The Schedule is linked by reference to section 11 of the Income Tax Bill, 2025. It purports to operate in computing "total income of a tax year" and excludes certain incomes "subject to the conditions mentioned" in column D. Coverage includes personal allowances and pensions, agricultural land compulsory acquisition gains, subsidies for specified commodities, incomes of research associations, professional associations, khadi/village industries institutions, securitisation trusts, various investor protection funds, Core Settlement Guarantee Fund, local authorities, provident funds, international sporting events, bodies established under treaties, and strategic petroleum replenishment arrangements.

Definitions and explanations are provided in the Notes appended to the Table, for selected expressions such as "disaster", "family", "Sikkimese", "concerned Board", "local authority", "Khadi and Village Industries Commission", "securitisation", "commodity exchange", "depository", and "recognised clearing corporation".

Statutory Provision Mode

Text & Scope

The Schedule operates as a table with three columns: (B) income not to be included, (C) eligible persons, and (D) conditions. Key entries include:

• Exclusion of sums received by HUF members (Sl. No.1), subject to non-overlap with section 99(3) & (4) and payment from family income or estate of family.
• Partners' share of firm income where the firm is separately assessed (Sl. No.2), provided share is as per profit-sharing ratio in partnership deed.
• Compensation on account of disaster from governments/local authorities to individuals or heirs, provided no earlier deduction for loss/damage was claimed (Sl. No.3).
• Partial withdrawals from National Pension System Trust (Sl. No.4), with limits capped at 25% of contributions and subject to PFRDA Act terms.
• Exemptions for various parliamentary/legislative allowances, travel concessions for leave/retirement, certain perquisites where employer pays tax, rent allowances for residence, and allowances incurred in performance of duties (Sl. Nos.5-13).
• Exclusions for pensions and family pensions in respect of gallantry awardees and armed forces deaths in operational duties (Sl. Nos.14-16).
• Exclusion of limited incomes included u/s 99(1)(d) up to Rs.1,500 per minor child (Sl. No.17).
• Capital gains from compulsory acquisition of agricultural land under specified conditions (Sl. No.18).
• State/area-based exclusions for Scheduled Tribe members or Sikkimese on incomes from particular areas and for dividends/interest (Sl. Nos.19-20).
• Sectoral subsidies (tea, rubber, coffee, cardamom etc.) where certified by concerned Boards (Sl. No.21).
• Exclusion for local authorities' incomes from house property, capital gains, other sources, or business where services/commodities are supplied within jurisdiction (Sl. No.22).
• Research associations and professional associations/institutions, subject to application of income to objects, specified investments, approvals and withdrawal procedures (Sl. Nos.23-24).
• Exemptions for institutions supporting khadi/village industries, securitisation trusts, investor protection funds, Core Settlement Guarantee Fund, trade unions, provident funds, international sporting event incomes, treaty bodies, reverse mortgage loan proceeds (Sl. Nos.25-37).

Interpretation

Legislative intent, as deducible from the text, is to continue targeted tax exemptions that promote public policy objectives: support to veterans and gallantry awardees, incentivising specific agricultural/plantation sectors, facilitating market infrastructure (investor protection funds, clearing funds), encouraging khadi/village industries and research/professional bodies, and ensuring certain social and administrative reliefs (disaster compensation, pensions). The Schedule delegates details to "prescribed" rules and notifications in multiple places, indicating legislative reliance on subordinate legislation for operational specifics.

Exceptions/Provisos

Many entries include provisos limiting the scope: caps (e.g., 25% on NPS withdrawal exclusion), territorial/temporal tests (agricultural land used for two years, compensation received on or after 1-4-2004), conditions of approval (research/professional/khadi institutions), notification requirements (Central Government), certificate filing (subsidy under concerned Board), and investment modes for funds (section 350 referenced). Several provisions explicitly state "Nil" or omit further conditions.

Illustrations

• Employee A receives partial NPS withdrawal of Rs.100,000 after satisfying PFRDA conditions. Exclusion is limited to Rs.25,000 (25% of contributions), subject to PFRDA terms.
• Firm profits distributed to Partner P as per partnership deed; the partner's share received in his hands is excluded from his total income provided the distribution follows the deed ratio (Sl. No.2).
• Research Association R, approved u/s 45(3)(a), applies income wholly to its object and invests only in modes specified in section 350; its income is excluded subject to prescribed conditions.

Interplay

The Schedule cross-references multiple statutory instruments and other provisions: Disaster Management Act, PFRDA Act, Companies Act, Securities and Exchange Board rules, Depositories Act, Khadi and Village Industries Commission Act, Provident Funds Act, Securitisation Act, and various regulations. The Schedule repeatedly conditions exclusions on prior approval, notification, prescribed modes of investment, prescribed procedural matters and certificates to be filed with Assessing Officer. These interactions create dependency on subordinate rules and other statutes for full operability.

Differences between SCHEDULE III - Income-tax Act, 2025 (Document 1) and SCHEDULE III - Income Tax Bill, 2025 - Old Version (Document 2) and Practical Impact

• Reference to National Pension System payment: Document 1 (Act) cites section 124; Document 2 (Bill) cites section 121.

  Practical impact: Potential change in statutory hook for the exemption; taxpayers and administrators must map which provision (section 121 or 124) governs NPS partial withdrawals. If the Bill text (section 121) was renumbered in the enacted Act (section 124), there is a drafting/renumbering discrepancy; this affects locating the governing scheme provision and assessing eligibility.

• Perquisite/tax-payment clause (Sl. No. 10): Document 2 (Bill) contains an additional clause (c): "such perquisite is paid irrespective of section 200 of the Companies Act, 1956 (1 of 1956)." Document 1 (Act) omits this clause.

  Practical impact: The Bill's additional clause expressly addresses company withholding provisions (s. 200, Companies Act, 1956) suggesting an intention to clarify that employer payment of tax on perquisite is effective even where Companies Act withholding rules might otherwise apply. Its omission in the Act could create uncertainty about interaction with company law withholding obligations and whether employer tax-payment satisfies all compliance facets.

• Cross-references to section 99 sub-subparagraphs (Sl. No. 1 and Sl. No. 17): Document 1 references section 99(3) and (4) / section 99(1)(c); Document 2 references section 99(3) and (4) / section 99(1)(d) respectively.

  Practical impact: Difference in sub-clause numbering changes the subset of incomes being excluded; this affects which minor-child income or specific inclusions are covered. Practitioners must check the correct numbering in the rest of the statute to determine which incomes are intended to be carved out.

• Language and formulation differences in multiple clauses (Sl. Nos. 2, 4, 8, 11-13, 18, 21, 23-26, 30, 36, 38, etc.). Examples include "is as per the profit-sharing ratio provided" (Act) vs "The sum received is as per the profit-sharing ratio provided" (Bill) and "as may be prescribed" vs "as prescribed".

  Practical impact: Mostly stylistic; some differences (use of "may be prescribed" versus "prescribed") can carry interpretive weight: "may be prescribed" signals enabling power; "prescribed" can indicate that rules are already framed or that compliance depends on existing prescriptions. If substantive, such wording alters delegation of rulemaking and potential timing of conditions becoming operational.

• References to subsidiary legislation/regulation dates and instrument identifiers in notes: notable differences include

  • Recognised clearing corporation definitions: Document 1 cites regulations of 2018; Document 2 cites regulations of 2012 (Note 11(a)(i) and (b)(i)).
  • Regulatory cross-references for securitisation and clearing (various notes) differ in punctuation and clause references.
  • Khadi and Village Industries Commission Act citation: Document 1 note shows "61 of 1956" while Document 2 shows "91 of 1956".

  Practical impact: Incorrect or inconsistent cross-references and dates can cause confusion when applying definitions or locating the correct regulatory instrument. A wrong Act number for the Khadi Act or an incorrect year for regulations can lead to mis-identification of the applicable normative instrument, potentially delaying compliance or misapplying exemption conditions until clarified by official corrigenda.

• Nil / blank condition fields: In a few Sl. Nos., Document 1 expressly records "Nil" under Conditions whereas Document 2 leaves spaces or uses non-breaking spaces ( ).

  Practical impact: Likely no substantive change; formatting differences can, however, create ambiguity in machine-read processing or automated compliance systems until reconciled.

Practical Implications

• Compliance and risk areas: Taxpayers must ensure strict adherence to conditions (certificates, notifications, territorial and temporal tests) to claim exclusions; failure to furnish certificates or satisfy approval/notification conditions risks denial. Where the Schedule delegates to "prescribed" rules, taxpayers and practitioners must monitor subordinate legislation for operative criteria.
• Record-keeping/evidence: The Schedule implicitly requires documentary proof - certificates from concerned Boards (Sl. No.21), evidence of domicile/registration (Sikkimese, Scheduled Tribe residence), proof of replenishment for petroleum arrangements, partnership deeds, approval orders for associations, and proof of payment of rent and expenses for allowances. Maintaining contemporaneous records, approval letters and notifications will be crucial.

Key Takeaways

• Schedule III enumerates targeted exclusions from "total income" tied to discrete policy objectives and beneficiary classes.
• Most exclusions are conditional and require compliance with prescribed procedures, certificates, approvals or notifications; subordinate legislation plays a central role.
• Sectoral exclusions (tea, rubber, coffee, khadi, investor protection funds, securitisation trusts) continue to be recognised but hinge on certification/notification.
• Personal reliefs (NPS partial withdrawal, travel concessions, rent allowances, pensions to gallantry awardees) are retained but subject to quantifiable limits and conditions.
• Cross-references to other statutes and regulations are numerous; accurate application requires concurrent review of those instruments.
• Drafting and reference inconsistencies (e.g., section and regulation numbers) in the Bill text require attention to avoid misapplication; practitioners should verify authoritative enacted text and any corrigenda.
• Documentation and approval evidence will be central to successfully claiming exclusions and to withstand assessment scrutiny.

Full Text:

SCHEDULE III INCOME NOT TO BE INCLUDED IN TOTAL INCOME OF ELIGIBLE PERSONS