Direct Tax Laws & International Taxation · Incomes which do not form part of Total Income

Exemptions for Specified Entities, Funds and Bodies (Income-tax Act, 2025)

Updated 5 October 2026 · Fact-checked

Certain funds, authorities, bodies and institutions have income that is left out of total income, but only if they fit the exact description in the Act's list of exempt incomes and meet every condition, such as notification, registration or no commercial income. Check the entity, the income type, the conditions and the exclusions, then exempt only the qualifying part.

Understand Exemptions for Specified Entities, Funds and Bodies

Most income is taxed. The Act, however, lists incomes that are not included in total income. Some of these depend on who earns the income. They cover local authorities, notified authorities, regulated funds, mutual funds, business trusts, pension and infrastructure vehicles, and similar bodies. These are the specified entity exemptions.

The logic is policy. The State does not tax its own bodies, and it wants to encourage funds that channel savings into markets, infrastructure and pensions. So the law exempts income at the entity level. It then usually taxes the person who finally receives the money, such as the unit holder or investor. This avoids double taxation and lets the entity pass income through.

Every exemption in this group is conditional. The common conditions are: (1) the entity must fall in the named class, for example a SEBI-registered fund or a body notified by the Central Government; (2) it must be notified, approved or registered where the provision says so; (3) only the named type of income is exempt, and not all of its income; (4) there are often exclusions, such as income from business or commercial activity, or from non-specified sources; (5) any time limit or condition stated in the notification must be met.

So you should not learn this topic as a list of entities to memorise. Learn it as a test with four questions. Who is the earner? What income is it? What conditions does the Act or the notification impose? What is excluded? Read the exact list in the Act's schedules from your ICAI material. Your marks come from applying the test to the facts in the case.

Key rules to remember

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.

How to solve Exemptions for Specified Entities, Funds and Bodies questions

Use the same sequence for any question on exempt income of a fund, authority or body. It keeps your answer in provision-facts-conclusion form.

1Identify the entity from the facts: local authority, notified body, mutual fund, business trust, pension or infrastructure vehicle, or other.
2State the provision in plain words: the class of entity, the income covered and the conditions. Do not quote a section number unless you are sure of it.
3List every income the entity earns and mark each one: possibly exempt, or clearly taxable (for example business income or income outside the named type).
4Test the conditions against the facts: registration or approval, notification, source of income, no commercial activity, any monetary or time limit.
5Apply the exclusions. If the facts show commercial or business income where the provision excludes it, move that income to taxable.
6Compute the exempt amount and the taxable amount. Check that exempt plus taxable equals total income of the entity.
7Check the pass-through effect on the investor or unit holder and any TDS angle, if the question asks for it.
8Write a conclusion in one line: how much is exempt, how much is taxable, and why.

Quickest way: Entity-Income-Condition scan

When to use it: Use it for 2 to 4 mark questions and for case-scenario MCQs, where you must decide quickly whether income is exempt.

Underline the entity type and the income type in the question.
Ask: is this the exact entity and exact income named in the exemption? If the income is from business, be suspicious.
Look for the trap words: not notified, commercial, business, after the time limit, not registered, outside India.
If a trap word is present, the income is usually taxable. If no trap word appears, still confirm the entity, the income type and the conditions before you treat the income as exempt.
For MCQs, pick the option that splits exempt from taxable income, not the one that exempts everything.

Common mistakes in Exemptions for Specified Entities, Funds and Bodies

Exempting all income of a notified or specified body.
Students remember the entity as exempt and forget that the exemption attaches to a type of income.
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.
The facts in the question may mention the entity only briefly, and students assume the condition is met.
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 the investor's receipt as exempt because the fund's income is exempt.
Students confuse entity-level exemption with exemption for the person who receives the distribution.
Fix: Treat the entity and the recipient as two separate assessees. Check separately how the recipient is taxed.
Allowing full expenditure against an entity that has both exempt and taxable income.
Students compute taxable income without applying the disallowance for expenditure related to exempt income.
Fix: Identify expenditure linked to exempt income and disallow it, as per the disallowance method. Then compute taxable income.
Mixing this topic with the exemptions for charitable trusts and political parties.
All of these appear in the same chapter on incomes not forming part of total income, and the conditions look alike.
Fix: Keep separate boxes: specified entities and funds here; trusts and institutions under their own regime; political parties under theirs. Name the right regime in your answer.
Quoting old Act terms or section numbers from memory.
Older notes use the previous Act's numbering and the term assessment year.
Fix: Use the Income-tax Act, 2025 vocabulary, with tax year and the new numbering from the current ICAI material. If you are unsure of a number, state the rule in words.

Worked examples

Example 1

An authority is notified by the Central Government as a body whose income is exempt, on the condition that the exemption does not cover income from commercial activity. In the tax year it receives government grants of ₹40,00,000, fees for its regulatory function of ₹10,00,000 and rent from letting out a commercial complex of ₹6,00,000. Compute the taxable and exempt income (ignore expenditure). Assume the notification terms are as stated.

Show the solution

Entity: a notified body. The exemption depends on the notification and its terms.
Grants of ₹40,00,000 and regulatory fees of ₹10,00,000 relate to its authority functions and are not commercial activity. They fall within the notified exemption. Exempt: ₹50,00,000.
The rent of ₹6,00,000 comes from commercial letting. The notification excludes commercial activity, so it is outside the exemption.
Taxable income = ₹6,00,000 (before expenditure, which is ignored here). Total income of the body = ₹56,00,000, of which ₹50,00,000 is exempt.
Check: 50,00,000 + 6,00,000 = 56,00,000.

Answer: Exempt: ₹50,00,000. Taxable: ₹6,00,000 (commercial rent). The exemption covers only the non-commercial income, as the notification provides.

Example 2

A business trust (an infrastructure or real estate vehicle) earns interest of ₹30,00,000 from a special purpose vehicle (SPV) in which it holds shares, and bank interest of ₹2,00,000 on surplus cash. Assume the trust passes the whole ₹30,00,000 of SPV interest through to its unit holders in the same tax year, and that ₹3,00,000 of it goes to a resident unit holder, Mr. Rao. Explain the tax position of the trust and of Mr. Rao (ignore expenditure).

Show the solution

Entity: a business trust. The trust-level exemption for interest received from its SPV works because the income is passed through to unit holders, and it is subject to the conditions of the provision. This example assumes all ₹30,00,000 is distributed. If part were not distributed, you would need the provision's specific treatment of that part. Do not treat it as permanently exempt without checking.
SPV interest of ₹30,00,000: exempt in the trust's hands, as it is the named type of income received from the SPV and it is passed through. The exemption covers only interest received from the SPV, not other items of income.
Bank interest of ₹2,00,000 is not income received from the SPV. It is outside the named exemption and is taxable in the trust.
Pass-through: the exemption is at trust level only. Mr. Rao is a separate assessee. Interest distributed to him is taxable in his hands. His tax is on the ₹3,00,000 distributed to him, not on the trust's total exempt income of ₹30,00,000.
The trust deducts tax at source on the distributed interest at the rate specified in the provision for a resident unit holder. Assume TDS at 10% for illustration, and confirm the actual rate in the current ICAI material for the Income-tax Act, 2025. Tax deducted = 10% × ₹3,00,000 = ₹30,000 (assumed rate).
Summary: exempt at trust level = ₹30,00,000. Taxable income of the trust = ₹2,00,000 (before expenditure).
Check: exempt ₹30,00,000 + taxable ₹2,00,000 = total income ₹32,00,000.

Answer: The trust: ₹30,00,000 of SPV interest, passed through to unit holders, is exempt and ₹2,00,000 of bank interest is taxable, so total income is ₹32,00,000. Mr. Rao: the ₹3,00,000 distributed interest is taxable in his hands, and the trust deducts tax at the rate specified in the provision. At an assumed 10% for illustration, that is ₹30,000.

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.

Practice questions from Incomes which do not form part of Total Income

Exemptions for Specified Entities, Funds and Bodies in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Exemptions for Specified Entities, Funds and Bodies: frequently asked questions

Is all income of a specified fund or authority exempt?

No. The exemption covers only the type of income named in the provision, and only if the conditions are met. Business or commercial income, or income of other types, is usually taxable.

Does exemption of a mutual fund's income mean the investor pays no tax?

No. The exemption is at the fund's level. The investor is a separate assessee and is taxed on what he receives or realises, as the Act provides for that income.

Do I need to quote section numbers in the exam?

Quote a number only if you are sure of it under the Income-tax Act, 2025. Marks mainly go for stating the rule, applying the conditions to the facts and concluding correctly.

How is this topic different from exemption of charitable trusts?

Specified entity exemptions work through listed entities and income types, with their own conditions. Charitable and religious trusts are governed by a separate regime of registration, application of income and accumulation. Do not mix the two in an answer.