CHAPTER III — INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

Section 11 — Incomes not included in Total Income (general)

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Incomes not included in total income.

11. (1) In computing the total income of any person for a tax year under this Act, any income enumerated in Schedules II, III, IV, V and VI shall not be included, subject to fulfilment of conditions specified therein.

(2) Wherever the conditions referred to in the Schedules referred in sub-section (1) are not satisfied in any tax year in respect of any income enumerated in the said Schedules, such income shall be charged to tax under this Act on the total income for that tax year.

(3) The persons enumerated in Schedule VII shall, subject to fulfilment of the conditions specified therein, not be chargeable to tax under this Act on the total income for a tax year.

(4) Wherever the conditions referred to in Schedule VII are not satisfied in respect of the persons enumerated in the said Schedule in any tax year, the income of such person shall be charged to tax under the provisions of this Act for that tax year.

(5) The Central Government may make rules or issue notifications for the purposes of this section as specified in Schedules II, III, IV, V, VI and VII.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Sections 10, 10A, 10AA, 10B, 11, 12, 13 of the 1961 Act

Section 10 of the 1961 Act — "Incomes not included in total income". A long enumerative section setting out, in fifty-odd numbered clauses, the categories of income that shall not be included in the total income of any person. Examples: clause (1) agricultural income; (2) sums received by a member of a HUF from the income of the HUF; (4) interest on tax-free securities; (5) leave travel concession; (10D) life insurance maturity proceeds; (13A) HRA; (14) special allowances; (15) interest on specified bonds; (23C) income of specified educational/medical institutions; (34) dividend [omitted by FA 2020]; (35) income from mutual fund units [restricted]; (38) capital gains on listed shares [omitted by FA 2018]; (44) NPS Trust; (46) specified body / authority; (48) certain royalty income of foreign company; etc.

Section 10A — exemption for newly established undertakings in Free Trade Zones [phased out post AY 2011-12]. Section 10AA — special provisions for newly established Units in SEZ [continues with sunset]. Section 10B — newly established 100% EOUs [phased out]. Sections 11, 12 — exemption for income from property held for charitable / religious purpose; voluntary contributions to charitable trusts. Section 13 — anti-abuse provisions for charitable trusts (denial of s. 11/12 exemption in specified circumstances).

BLOCK 3 : COMMENTARY

Section 11 is the gateway exemption section. It tells us that certain incomes, listed in Schedules II to VI, shall not enter the total income — and certain persons, listed in Schedule VII, shall not be chargeable to tax at all on their total income. The section itself is short; the substantive content is in the Schedules.

Sub-section (1) — Schedules II, III, IV, V, VI. The five Schedules carry the operative content of what was earlier section 10 of the 1961 Act, distributed by subject matter. In broad terms: Schedule II contains general exempt incomes (agricultural income, HUF receipts, partner's share of profits, leave travel concession, gratuity, leave encashment, retrenchment compensation, voluntary retirement compensation, life insurance proceeds, statutory provident fund withdrawals, etc., with the conditions and limits of each preserved word-for-word from old s. 10). Schedules III to VI cover, in turn, special-class exemptions for venture capital, infrastructure investment trusts, business trusts, sovereign wealth funds, IFSC units, foreign airlines and shipping companies under reciprocity, and similar specialised categories.

The drafting innovation of consolidating exemptions into Schedules has the following advantages: (i) future amendments do not interrupt the section-numbering of the operative chapters; (ii) the conditions for each exemption are set out in tabular or sub-paragraph form rather than as bolted-on Explanations; (iii) the Central Government's rule-making power (sub-section (5)) is anchored expressly to the Schedules.

Sub-section (2) — failure of conditions. If the conditions specified in Schedules II to VI are not satisfied in any tax year, the income that would otherwise have been exempt is charged to tax. This codifies the well-established proposition under old s. 11 / s. 12AA that exemption is conditional, not automatic — see CIT v. Programme for Community Organisation (2001) 248 ITR 1 (SC), Asstt. CIT v. Thanthi Trust (2001) 247 ITR 785 (SC). The same approach applies under the new section.

Sub-section (3) and (4) — Schedule VII (entirely exempt persons). Schedule VII enumerates persons whose total income is wholly outside the income-tax charge — chiefly the President of India, certain constitutional functionaries, the United Nations and its specialised agencies under the UN Privileges and Immunities Act, foreign sovereign states under sovereign immunity principles, and bodies notified by the Central Government for the purpose. The architecture of treating these as non-chargeable persons (rather than persons with exempt income) is conceptually cleaner — the question for them is whether the Indian Income-tax Act applies at all.

If the conditions in Schedule VII are not satisfied (for instance, a notified body whose activity exceeds the notification's scope), the entire income becomes chargeable. This is consistent with the strict-construction rule for exemption provisions: Hansraj Gordhandas v. H.H. Dave (1969) AIR 1196 (SC) (Customs), applied to income tax in CIT v. Karnataka Power Corporation (2017) 9 SCC 743 — exemption is to be strictly construed but, once the assessee enters within the four corners of the exemption, it is liberally applied.

Sub-section (5) — rule-making and notification. The Central Government may make rules or issue notifications for the purposes of section 11 as specified in Schedules II to VII. This is a delegated-legislation power with a specific anchor — the rules / notifications must trace back to a particular Schedule entry. Notifications under old s. 10(23C) (educational and medical institutions), s. 10(46) (specified bodies), s. 10(15) (interest on specified bonds), and s. 10(4D) (specified fund manager) will need to be re-issued under the corresponding Schedule entries; until re-issued, the savings clause in section 536 keeps the existing notifications alive.

Charitable / religious trusts — re-positioned. Sections 11, 12 and 13 of the 1961 Act dealt with the income of charitable / religious trusts. Under the 2025 Act, this regime has been re-housed: the gateway exemption is still in section 11 (read with the relevant Schedule), but the substantive provisions on accumulation, registration under section 12A / 12AB, reporting, audit and denial-on-abuse are gathered into Chapter XVII of the new Act (Special Provisions Relating to Certain Persons), Sections 332 to 359 (corresponding to old ss. 11, 12, 12A, 12AA, 12AB, 13). The split — gateway in Chapter III, regime in Chapter XVII — is a notable architectural change. Practitioners advising charitable trusts must now read Chapter III together with Chapter XVII.

SEZ exemptions — sunset and grandfathering. Old s. 10A (FTZ) and s. 10B (EOU) have been phased out for fresh undertakings since 2011. Old s. 10AA (SEZ Units) was the live exemption — the FA 2020 sunset clause provides that no SEZ Unit which commences operations after 30 September 2020 (later extended) is eligible. The 2025 Act preserves the grandfathering. Existing SEZ units enjoying the unexpired part of their 15-year tax holiday continue under the new Act through Schedule VI provisions and section 536 (savings).

Continuity of jurisprudence. Every Supreme Court decision interpreting old s. 10 — agricultural income (Bacha F. Guzdar; Sakarlal Naranlal v. CIT (1965) 56 ITR 503), HRA (Hindustan Motors Ltd. v. CIT (1981) 130 ITR 367), capital gains exemption (CIT v. Mehrunisa Naqvi (2009) 313 ITR 84), educational institution exemption (Queen's Educational Society v. CIT (2015) 372 ITR 699 (SC)) — applies in identical terms to the corresponding Schedule entry under the 2025 Act, because the substantive content has been preserved.

Practical takeaways. (i) Whenever advising on an exemption claim, identify (a) the Schedule that lists the income, (b) the specific conditions (often timing, reporting, audit, registration, or notification), and (c) any rule-making notification operationalising the exemption. (ii) For charitable trusts, the gateway in section 11 is necessary but not sufficient — registration and ongoing compliance under Chapter XVII (sections 332 onwards) is the core. (iii) For SEZ units, document the date of commencement of operations and the unexpired period of tax holiday; the 5-year-100% / 5-year-50% / 5-year-50%-of-reinvested-reserve formula of old s. 10AA is preserved in Schedule VI. (iv) Re-issuance of notifications under the new Act is expected from the CBDT during 2026; track CBDT website for updates. (v) For salaried employees, the long list of allowances (HRA, LTC, special allowances, gratuity, leave encashment, etc.) is in Schedule II — keep this Schedule readily accessible during return-filing season.

Section 12 — Incomes not included in Total Income of Political Parties and Electoral Trusts

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Incomes not included in total income of political parties and electoral trusts.

12. (1) In computing the total income of any political party or an electoral trust for a tax year under this Act, any income enumerated in Schedule VIII shall not be included, subject to fulfilment of conditions specified therein.

(2) Wherever the conditions referred to in Schedule VIII are not satisfied in any tax year in respect of any income enumerated in the said Schedule, such income shall be charged to tax under this Act for that tax year.

(3) The Central Government may make rules or issue notifications for the purposes of this section as specified in Schedule VIII.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Sections 13A and 13B of the 1961 Act

Section 13A — Special provision relating to incomes of political parties. Any income of a political party which is chargeable under the heads "Income from house property", "Income from other sources", "Capital gains", and any income by way of voluntary contributions, shall not be included in the total income, subject to: (a) the political party keeps and maintains books of account; (b) names and addresses of voluntary contributors of more than Rs 20,000 are recorded (modified by FA 2017 to Rs 2,000 in cash, with electronic / electoral-bond contributions exempt from naming); (c) accounts audited by a CA; (d) report under section 29C of the Representation of the People Act, 1951 to the Election Commission within the prescribed time.

Section 13B — Special provisions relating to voluntary contributions received by electoral trusts. Voluntary contributions received by an electoral trust shall not be included in the total income, subject to (a) such trust distributes 95% of the contributions to a registered political party in the year of receipt; (b) such trust functions as per rules made by the Central Government.

BLOCK 3 : COMMENTARY

Section 12 of the 2025 Act re-states sections 13A and 13B of the 1961 Act in a single provision pointing outwards to Schedule VIII. The substantive rules — the four conditions for political party exemption, and the 95% pass-through rule for electoral trusts — are preserved in Schedule VIII without disturbance.

Background. Section 13A was inserted by the Taxation Laws (Amendment) Act, 1978, in response to the felt need for a clear, transparent regime for the taxation of political parties. The rule was that voluntary contributions, dividends, interest, and rent received by a political party are exempt, subject to the party maintaining books, recording donor identities, having its accounts audited, and filing an annual statement with the Election Commission. Section 13B was inserted by the Finance (No. 2) Act, 2009 to govern the rapidly emerging "electoral trust" model — corporate-style intermediaries that pool voluntary political contributions and distribute them to political parties.

Major Finance Act amendments to remember. (a) FA 2013 — introduced Rule 17CA on electoral trust governance. (b) FA 2017 — restricted cash contributions above Rs 2,000; declared anonymous donations above the limit non-eligible for exemption; also introduced the "electoral bond" carve-out where the donor's name need not be recorded. (c) FA 2022 — amended s. 13A to provide that a political party shall not be exempt unless the return of income is filed within the due date specified under section 139(4B). The 2025 Act preserves all these amendments through Schedule VIII.

Sub-section (1) — incomes covered. Although section 12 is silent about the heads of income covered, Schedule VIII enumerates them: house property, other sources, capital gains, and voluntary contributions. "Profits and gains of business or profession" income of a political party is not covered — political parties are not expected to run business undertakings, and any such income would be taxable. This corresponds to the equivalent treatment under old s. 13A.

Sub-section (2) — failure of conditions. If any of the four conditions (books of account, donor records above the limit, audit, ECI filing) is not satisfied, the entire income that would have been exempt becomes chargeable. The strict-construction principle applies: a political party which fails to file its annual return within the due date loses the exemption for that year (FA 2022 amendment, codified in Schedule VIII). The Supreme Court's decision in Common Cause v. Union of India (1996) 222 ITR 260 (SC) — political parties not maintaining books are not entitled to s. 13A exemption — continues to apply.

Electoral bond regime. Until struck down by the Supreme Court in Association for Democratic Reforms v. Union of India (2024) — declaring electoral bonds unconstitutional and ordering disclosure — political contributions through electoral bonds were anonymous to the political party. The 2024 ruling required the State Bank of India to disclose all electoral bond purchasers and recipients. Going forward, the electoral bond carve-out from the donor-naming requirement is effectively unavailable; political parties must record names of all contributors above Rs 2,000 to qualify for exemption. Schedule VIII of the new Act will likely be amended in line with the Supreme Court's directions.

Electoral trusts — the 95% pass-through. An electoral trust qualifies for full exemption only if it distributes at least 95% of the aggregate of voluntary contributions received during the year (plus surplus brought forward from earlier years) to registered political parties before the end of the financial year. The remaining 5% may be retained for administrative expenses. Failure to meet the 95% threshold disqualifies the trust for the entire year. Practitioners advising electoral trusts must monitor the 95% distribution carefully through the financial year.

Reporting under the Representation of the People Act, 1951. Section 29C of the RPA, 1951 requires every political party to submit, by the 30th day of September each year, a report on contributions received in the previous financial year above Rs 20,000 (in some cases Rs 2,000) to the Election Commission. Failure to comply forfeits the income-tax exemption. The cross-reference between the income-tax law and the RPA is therefore live — practitioners must coordinate annual compliance under both statutes.

Practical takeaways. (i) For political parties: prepare a four-fold compliance checklist annually — (a) Books of Account, (b) Donor Register (with PAN for contributions above the limit, except electoral bond / electronic-mode contributions where carve-outs apply), (c) Audit by a Chartered Accountant, (d) Annual ECI return under s. 29C of the RPA. The fifth implicit requirement post-FA 2022 is timely filing of the income-tax return under s. 139(4B) of the old Act / corresponding section of the new Act. (ii) For electoral trusts: monitor the 95% pass-through; document the receiving political parties' registration status and the date of distribution; ensure compliance with Rule 17CA (governance, board composition, beneficiary records). (iii) Watch for legislative response to the Supreme Court's electoral bond ruling — Schedule VIII may be amended. (iv) For corporate donors: contributions to a political party or an electoral trust qualify for deduction under section 80GGB / 80GGC of the old Act (corresponding to section 132 of the new Act, in Schedule VIII or Chapter VIII). The donor's deduction is independent of the recipient's exemption — both must be tested separately.

Chapter III — At a Glance

Mapping table for Chapter III:

Practitioner notes

• Schedule II is the most-used Schedule for individual assessees — keep a current copy for return-filing season.
• For charitable trusts, the gateway exemption is in Chapter III but the operative regime (registration, accumulation, audit, denial-on-abuse) is in Chapter XVII (ss. 332-359 of new Act).
• Existing notifications under s. 10(23C), s. 10(46) etc. survive under section 536 (savings); new notifications will be issued under the corresponding Schedule entries during 2026.
• For SEZ units, the 15-year tax holiday under old s. 10AA continues under Schedule VI for grandfathered units; no fresh exemption for units commencing after the FA 2020 sunset.
• Electoral bond regime to be reconfigured following the Supreme Court's 2024 ruling in Association for Democratic Reforms — track CBDT and ECI notifications.
• For electoral trusts: 95% pass-through to political parties is mandatory; track distribution monthly.