Income which does not form part of Total Income: formula sheet

Key formulas

Exempt income rule

Total income = Taxable income under all heads − Income not forming part of total income

Exclude an item only if it is covered by Section 14 and the Schedules it refers to, and every condition for the specific item is met.

Disallowance of related expenditure

Expenditure incurred in relation to exempt income = NOT deductible

The expenditure is added back (or simply not claimed) in computing taxable income, whatever head it would otherwise fall under.

Adjusting book profit

Business income = Net profit as per P&L − Exempt income credited + Expenditure relating to exempt income debited + Other business adjustments

Do this in the profit-to-income reconciliation. Never deduct the exempt credit twice.

Allocation of common expenses

Disallowed share = Common expense × (Exempt activity base ÷ Total base)

Use only if the question gives a base or method. Directly attributable expenses are disallowed in full.

Not income vs exempt income

Capital receipt (not income) → outside charge; Exempt income → income, but excluded from total income

Related-expense disallowance is about exempt income, not about every receipt that is outside the charge.

When partial integration applies

Assessee is an individual, HUF, AOP, BOI or artificial juridical person AND net agricultural income > ₹5,000 AND non-agricultural income > basic exemption limit

If any one condition fails, agricultural income is simply ignored. Companies and firms pay at flat rates, so they do not use this method.

Step 1

Tax on (non-agricultural income + net agricultural income), at the normal slab rates

Treat the combined figure as total income for this step only.

Step 2

Tax on (basic exemption limit + net agricultural income), at the normal slab rates

The slabs and the basic exemption limit depend on the tax regime and, where relevant, the age of the assessee. Use the slabs and limit given in the question.

Tax payable

Step 1 tax − Step 2 tax

Then deduct any rebate and add surcharge, if applicable, and health and education cess as the question requires.

Composite income split

Agricultural part = composite income × agricultural % ; business part = composite income × business %

The percentages come from the rules made under the Income-tax Act, 2025 (for example 60:40 for tea grown and manufactured by the seller). Apply them to the composite income computed under those rules, that is, after deducting cultivation and manufacturing costs in the examples on this page.

Gratuity: Government death-cum-retirement gratuity and defence services retiring gratuity

Exempt = Entire amount

Applies to death-cum-retirement gratuity under the specified Central, All-India, State or local authority pension rules, and retiring gratuity under defence services pension rules.

Gratuity under the Payment of Gratuity Act, 1972

Exempt = Amount received, restricted to the amount calculated under section 4(2) and (3) of that Act

For employees covered by that Act.

Any other gratuity (on retirement, incapacity before retirement, or termination)

Exempt = Least of (a) actual gratuity; (b) amount notified by the Central Government; (c) ½ × A × B

Limb (c) is worded in the Act as half month's salary for each completed year of service, so (c) = ½ × A × B. A = average salary of the ten months immediately preceding the month of the event; B = completed years of service. 'Salary' includes dearness allowance only if the terms of employment so provide, and excludes all other allowances and perquisites.

Aggregate cap on gratuity

Deduction ≤ A − B

A = limit notified by the Central Government; B = gratuity received in earlier tax years and already allowed as exempt. Applies where gratuity comes from one or more employers.

Leave encashment on retirement: Central or State Government employee

Exempt = Entire amount

Cash equivalent of earned leave at credit at retirement, whether on superannuation or otherwise.

Leave encashment on retirement: other employees

Exempt = Least of (a) cash equivalent of earned leave at credit (entitlement not above 30 days for every year of actual service); (b) 10 × average monthly salary of the preceding ten months; (c) amount notified by the Central Government; (d) actual payment received

Salary includes DA only if the terms of employment so provide. The A − B aggregate cap also applies across employers and tax years.

Retrenchment compensation to a workman

Exempt = Least of (a) compensation received; (b) amount under section 25F(b) of the Industrial Disputes Act, 1947; (c) notified amount, not less than ₹50,000

Compensation on closure of the undertaking, or on transfer in the specified cases, is deemed retrenchment compensation. Compensation under an approved scheme is exempt in full.

Voluntary retirement or termination under a scheme

Exempt = Lower of compensation received and ₹5,00,000

Only for the listed types of employers. Once allowed in a tax year, no VRS deduction is allowed in any other tax year. No deduction if relief under section 157 was allowed for the same amount.

Commutation of pension

Government and similar schemes, or from a Schedule VII fund: entire amount. Other employers: with gratuity, commuted value of one-third of pension; without gratuity, commuted value of one-half of pension

Commuted value takes account of age, health, interest rate and recognised mortality tables.

Standard deduction (for contrast)

₹75,000 or salary, whichever is less, where tax is computed under section 202(1); otherwise ₹50,000 or salary, whichever is less

This is a deduction from salary, not an exempt receipt, but it appears in the same Table.

Share of income from HUF

Member's share in HUF income = Exempt

Exempt in the hands of the member. The HUF itself is assessed on its income.

Basic treatment of exempt income

Total income = Taxable income − Exempt income (excluded before computing)

Exempt receipts are left out of gross total income. Show them as 'exempt' with a reason, not as a deduction.

Section 209: interest on specified bonds (non-resident)

Tax = 10% × interest on specified bonds bought in foreign currency

Applies to bonds of an Indian company under a notified scheme, or public sector company bonds sold by the Government.

Section 209: dividend on specified GDRs (non-resident)

Tax = 10% × dividend on specified GDRs bought in foreign currency through an approved intermediary

GDR must meet one of the three conditions listed in the Table.

Section 209: long-term capital gains on such bonds or GDRs

Tax = 12.5% × long-term capital gains

Section 72(6) does not apply when computing these gains.

Section 209: remaining income

Tax on (Total income − income at serial numbers 1 to 3) at rates in force

Other income of the non-resident is taxed at normal rates.

Section 209: deductions

If GTI has only the interest or dividend: no deduction under sections 28 to 58, 60, 61, 93(1)(a) or (e), or Chapter VIII

If GTI includes other income too, reduce GTI by the special income and allow Chapter VIII deduction on the reduced GTI.

Section 209: return filing

No return under section 263(1) if total income is only bond interest and GDR dividend and TDS was deducted

Both conditions must be met.

How Schedule V works

Exemption applies only if: person (col. C) + income (col. B) + conditions (col. D) all match

Schedule V is linked to section 11. The income is not included in the total income of the tax year.

Investment fund (Sl. 1)

Fund's income not included = all income other than 'Profits and gains of business or profession'

Conditions: Nil. Business or profession income stays in the fund's total income.

Unit holder of investment fund (Sl. 2)

Income referred to in section 224, being that proportion of income which is of the same nature as income chargeable under the head 'Profits and gains of business or profession' (as printed in Sl. 2)

Conditions: Nil. Quote the wording as printed and check it in the Act. Do not add a direction or conclusion beyond the text.

Business trust (Sl. 3 and 4)

Not included = interest or dividend from an SPV; for a REIT, also rent from real estate it owns directly

Conditions: Nil. An SPV is an Indian company in which the trust holds controlling interest and any required specific percentage.

Unit holder of business trust (Sl. 5)

Exempt = distributed income (section 223) minus the proportion that is (a) SPV interest and (c) REIT rental income

Clause (b), on SPV dividend, is omitted by Act 21 of 2026 with effect from 1-4-2026.

Venture capital (Sl. 6)

Not included = income from investment in a venture capital undertaking

For a venture capital company or fund, other than an investment fund under section 224(10)(a). Registration and investment conditions are in Note 4.

Specified person (Sl. 7)

Dividend, interest, section 92(2)(k) sums and long-term capital gains are not included if: made 1-4-2020 to 31-3-2030, held at least 3 years, in an eligible entity

If a condition fails in a later tax year, the income is chargeable in that year.

Eligibility thresholds in Note 5

Eligible AIF: at least 50% investment. Eligible domestic company: set up on or after 1-4-2021 with at least 75% investment. Eligible NBFC: at least 90% lending.

Each threshold applies to eligible infrastructure entities (and, for an AIF, also to the other eligible entities). Computed in the prescribed manner.

Investment fund (Sl. 1)

Income of investment fund not included = all income other than income under the head 'Profits and gains of business or profession'

Business income of the fund is not covered by this row. No condition is attached.

Business trust (Sl. 3)

Not included = interest or dividend received or receivable from a special purpose vehicle

An SPV is an Indian company in which the trust holds controlling interest and the shareholding required by the law under which it is registered.

REIT rent (Sl. 4)

Not included = income from renting, leasing or letting out real estate asset owned directly by the REIT

Applies only to a business trust that is a real estate investment trust.

Unit holder of business trust (Sl. 5)

Distributed income under section 223 not included, except the proportion that is (a) SPV interest or (b) REIT rent from directly owned real estate

The old exception for SPV dividend (clause b) is omitted by Act 21 of 2026 with effect from 1-4-2026, so it no longer denies the exemption.

Venture capital (Sl. 6)

Income from investment in a venture capital undertaking is not included for a venture capital company or fund

Registration, 'not less than two-thirds of investible funds in unlisted equity or equity linked instruments' and the 15% limit are conditions of the definitions in Note 4. An investment fund specified in section 224(10)(a) is excluded from this row.

Specified person (Sl. 7) conditions

Investment made 1-4-2020 to 31-3-2030 AND held at least 3 years AND in an eligible entity

Income covered: dividend, interest, sums under section 92(2)(k), and long-term capital gains.

Eligibility thresholds in Note 5

Eligible AIF: not less than 50% investment. Eligible domestic company: set up and registered on or after 1-4-2021, minimum 75% investments. Eligible NBFC: minimum 90% lending

The AIF's 50% may be in eligible infrastructure entities, eligible domestic companies, eligible NBFCs or eligible InvITs. The domestic company's 75% investments and the NBFC's 90% lending must be in eligible infrastructure entities only. If the percentage is below 100%, the exempt income is worked out proportionately in the prescribed manner.

Loans and borrowings

Sovereign wealth fund or pension fund with loans or borrowings for investing in India = deemed not eligible for exclusion

Applies to Sl. 7 only.

Failure of condition

Condition fails in a later tax year = income previously left out becomes chargeable as income of that tax year

The income is taxed in the year of failure, not by reopening the earlier year.

Quick revision

• Exempt income is left out of Total Income; a deduction is allowed after computing income.
• Always check the person's status first: individual, HUF, institution, authority or foreign entity.
• Some exemptions are full, others only up to a limit; compute the excess as taxable.
• Many exemptions fail if a stated condition is not met, so read the condition before applying the exemption.
• Agricultural income has its own tests for what qualifies, so check the nature of the land and activity.
• Exempt agricultural income can still affect the tax rate computation in specified cases.
• Exempt investment and interest receipts apply only to the stated instruments and persons.
• Capital receipts are usually outside income only where the Act specifically exempts them.
• Use tax year 2026-27 and the Income-tax Act, 2025 terms in every answer.
• In computations, show the exempt amount separately so you earn step marks even if the final figure is off.

Common mistakes

• Treating every receipt that is not taxed as 'exempt income'. Fix: First ask whether the receipt is income at all. A loan or capital receipt is simply not income. Only items listed under Section 14 and its Schedules are exempt income.
• Claiming an exemption without checking its conditions. Fix: For each item write the condition next to it in your answer. If the question does not satisfy the condition, tax the item.
• Adding agricultural income into total income and taxing it Fix: Agricultural income is added only for the rate calculation. Show total income without it.
• Applying integration when non-agricultural income is below the basic exemption limit Fix: Check the conditions first. If non-agricultural income is within the limit, tax is nil and the agricultural income is ignored.
• Using last drawn salary or including all allowances in the gratuity formula. Fix: Use average salary of the ten months before the event. Under section 19(2)(b), salary is basic plus dearness allowance, and DA counts only if the terms of employment so provide. All other allowances and perquisites are excluded. If a question mentions commission or bonus, follow the facts and instructions given.
• Counting part years in completed years of service. Fix: B is the number of completed years. Drop the extra months.
• Treating the 10% section 209 rate as an exemption. Fix: Exempt income is excluded from total income. Section 209 income is included and taxed at a special rate.
• Applying section 209 to a resident or to bonds bought in rupees. Fix: Check that the assessee is a non-resident and the bonds or GDRs were bought in foreign currency.
• Treating the whole income of an investment fund as exempt. Fix: Sl. 1 excludes all income other than business or profession income. Business income stays in total income.
• Ignoring the three-year holding period or the date window for a specified person. Fix: Check that the investment is made from 1 April 2020 to 31 March 2030, is held for at least three years, and is in an eligible entity.

Exam tips

• In theory questions, answer in this order: define exempt income, name Section 14 as the gateway, give one example, then state the related-expenditure disallowance. This earns step marks.
• In MCQs, watch for the trap between 'not income' (a capital receipt such as a loan) and 'exempt income'. The two answer options often differ only on this point.
• In numerical questions, always show the reconciliation from the book profit. Writing 'less: exempt income credited' and 'add: expenditure relating to exempt income' as separate lines picks up marks even if the final figure is off.
• Read the question for the words 'directly', 'specific loan' and 'common expenses'. They tell you whether to disallow in full or apportion.
• State the assumption when a question says an item is exempt but gives no section. Write 'assumed to be covered by Section 14 and its Schedules, conditions satisfied' and move on.
• In the MCQ section, look for the trap: a farm-based activity that is not agricultural (dairy, poultry, dividends) or land outside India.
• In written answers, show Step 1, Step 2 and the difference in a small table of working. Step marks are given for each stage.
• State the conditions for integration in one line before you start. This earns marks even if the arithmetic goes wrong.