Incomes which do not form part of Total Income: formula sheet

Key formulas

Four-question test

Exempt = Right entity + Right income + Conditions met + Not excluded

All four must hold. If any fails, that income stays in total income and is taxed at the normal or special rate.

Partial exemption rule

Taxable income of entity = Total income − Qualifying exempt income

Exemption applies to the named income only. Other income of the same entity, such as commercial receipts, is taxable unless another provision exempts it.

Pass-through principle

Entity: exempt → Investor/unit holder: taxable on amount received (as per the provision)

For mutual funds and business trusts, exemption in the entity's hands does not mean the investor is exempt. Check how the Act taxes the recipient.

Notified-body condition

Exemption available only if notified and notification terms are satisfied

For bodies and authorities that need Central Government notification, the notification can restrict the income covered, for example by excluding commercial activity.

Expenditure on exempt income

Expenditure incurred in relation to income not forming part of total income is disallowed under the specific disallowance provision

Apply it as the facts require. Identify the expenditure that relates to the exempt income and disallow only that part. If an entity earns both exempt and taxable income, expenditure linked to the taxable income stays allowable. Study the disallowance topic with this one.

Income covered for a political party

House property + Other sources + Capital gains + Voluntary contributions = excluded, if all conditions are met

Business income is not covered. The party must be registered under section 29A of the Representation of the People Act, 1951.

Record of contributions

Record with donor name and address for each voluntary contribution > ₹20,000

The threshold is ₹20,000. Contributions up to ₹20,000 need no donor record under this condition.

Cash donation limit

No donation of ₹2,000 or more otherwise than by account payee cheque, bank draft, bank electronic clearing or other prescribed electronic mode

If a donation of ₹2,000 or more is received in any other way, the condition fails and the exclusion is not available on the party's covered income for that tax year. A cash donation below ₹2,000 does not breach it. Business income is taxable anyway.

Other compliance conditions for a party

Books of account + Contribution report filed by the due date

The report is the one required under section 29C of the Representation of the People Act, 1951. Audit is a separate compliance requirement, not a condition for this exclusion.

Electoral trust distribution test

Minimum distribution = 95% × Voluntary contributions received in the tax year

Distribution must be to registered political parties during the same tax year. Surplus brought forward is not added to the base. The trust may retain at most 5%.

Total disallowance by the prescribed method

Disallowance = (i) + (ii) + (iii)

Applies when the Assessing Officer is not satisfied with the assessee's claim about expenditure relating to exempt income, or when the assessee claims that no such expenditure was incurred.

Part (i): Direct expenditure

(i) = Expenditure directly relating to income that does not form part of total income

Take the full amount of costs identifiable with the exempt income. Do not apportion this part. Interest directly attributable to exempt income is taken here.

Part (ii): Interest not directly attributable

(ii) = A × B ÷ C

A = interest expenditure not directly attributable to any particular income or receipt. Exclude interest directly attributable to any particular income, including exempt income whose interest is already taken in part (i), so that nothing is counted twice. B = average of the value of investments, income from which does not or shall not form part of total income, at the beginning and at the end of the tax year, that is (opening value + closing value) ÷ 2. C = average of the total assets shown in the balance sheet at the beginning and at the end of the tax year, that is (opening + closing) ÷ 2. This part applies only if you have incurred interest expenditure not directly attributable to any particular income.

Part (iii): Administrative charge

(iii) = 0.5% × B

B is the same average of the opening and closing value of exempt-income investments as in part (ii). It is a flat estimate of indirect administrative cost.

Quick revision

• An exemption applies only if every stated condition is met on the facts.
• Check the person, the nature of income and the tax year before applying any exemption.
• Use only the Income-tax Act, 2025 terms: tax year, never assessment year.
• Group exemptions by individual, entity, fund and political party.
• Exempt income is excluded before computing gross total income.
• Entity exemptions depend on conditions, so read the conditions first.
• Political parties and electoral trusts have their own conditions for exemption.
• Expenditure linked to exempt income is disallowed when computing business profit.
• If the expense is directly attributable to exempt income, disallow that amount.
• Show the disallowance as a separate add-back line in your working.
• In case scenarios, find the hidden exempt receipt before you start computing.
• Write provision, facts and conclusion in written answers.

Common mistakes

• Exempting all income of a notified or specified body. Fix: Always write the income type next to the entity. Treat any business or commercial income as taxable unless the provision clearly covers it.
• Ignoring the need for notification, approval or registration. Fix: Check whether the facts say the entity is notified or registered. If they are silent and the provision needs it, state that the condition must be satisfied.
• Treating all income of a political party as exempt, including business profit. Fix: Learn the four covered items: house property, other sources, capital gains and voluntary contributions. Tax everything else.
• Confusing the ₹20,000 record threshold with the ₹2,000 cash limit. Fix: Donor name and address records are kept for contributions above ₹20,000. Donations of ₹2,000 or more must not be received in cash or non-prescribed modes.
• Using total interest as A instead of only the interest not directly attributable. Fix: Subtract interest directly attributable to any particular income before applying the formula. This covers a loan taken for a taxable business unit and also interest directly linked to exempt investments, which belongs in part (i) and must not be counted again in A.
• Applying 0.5% to total assets or to the exempt income. Fix: The 0.5% applies only to B, the average value of investments whose income is exempt.

Exam tips

• Write the entity, the income and the condition in the first line of your answer. Examiners mark the test you apply, not just the final figure.
• In case-scenario MCQs, look for the one fact that breaks the exemption: not notified, commercial income, or income of the wrong type.
• Always show the exempt and taxable parts separately in a computation, and show that they add up to total income.
• Use the Income-tax Act, 2025 terms (tax year, not assessment year). If you cannot recall a section number, state the provision in words rather than guess.
• Revise this topic together with the disallowance of expenditure relating to exempt income. Questions often combine the two.
• Write the conditions as a numbered list in the answer. Marks are given for each condition.
• In case scenarios, look for a hidden breach: a cash donation of ₹2,000 or more, a missing donor record, or a late contribution report.
• For electoral trusts, always show the working: base, 95% and the comparison with actual distribution.