SCHEDULES — INTRODUCTORY NOTE

SCHEDULE I — Conditions for Activities Not to Constitute Business Connection in India

Statutory anchor: Section 9(12) of the Act

Schedule I implements section 9(12) of the new Act, which provides that the activities of an eligible investment fund through an eligible fund manager located in India shall not, by themselves, constitute a 'business connection' in India for the foreign fund. The Schedule sets out the detailed eligibility conditions for both the fund and the fund manager. This is the famous 'Investment Manager Regime' (IMR) provision, originally inserted into the 1961 Act as section 9A by the Finance Act, 2015 to encourage location of fund management activities in India without creating tax exposure for the foreign fund.

BLOCK 1 : SCHEDULE TEXT (NEW ACT, 2025)

Schedule I — [See section 9(12)]

Conditions for Certain Activities Not to Constitute Business Connection in India

Paragraph 1(1) — The eligible investment fund means a fund established / incorporated / registered outside India which collects funds from members for investing for their benefit, fulfilling 13 conditions:

(a) the fund is not a person resident in India;

(b) the fund is a resident of a country / specified territory with which India has a DTAA, OR established in a country / specified territory notified by the Government;

(c) aggregate participation by Indian residents does not exceed 5% of corpus on 1 April / 1 October of the tax year (with carve-out for fund manager's seed capital up to Rs 25 crore in first 3 years of operation; 4-month grace period for breach);

(d) the fund is subject to investor-protection regulations in its home jurisdiction;

(e) the fund has minimum 25 members who are not connected persons;

(f) no member's participation interest (with connected persons) exceeds 10%;

(g) aggregate participation interest of 10 or fewer members (with connected persons) is less than 50%;

(h) the fund does not invest more than 25% of corpus in any single entity;

(i) no investment in associate entity;

(j) monthly average corpus not less than Rs 100 crore (with new-fund / wound-up carve-outs);

(k) the fund does not carry on / control any business in India;

(l) the fund is not engaged in any business connection-creating activity in India other than via the eligible fund manager;

(m) remuneration paid to fund manager is not less than the prescribed amount.

Paragraph 1(2) — Conditions (e), (f), (g) shall not apply to: (a) sovereign / Government / Central Bank funds; (b) other notified categories.

Paragraph 1(3) — Eligible fund manager: must satisfy 4 conditions: (a) not employee / connected person of fund; (b) registered as fund manager / investment adviser; (c) acting in ordinary course of business; (d) not entitled to more than 20% of profits.

Paragraph 1(4) — Annual statement to be filed within 90 days of tax year end.

Paragraph 1(5)-(6) — Board guidelines; carve-out for IFSC fund managers commencing operations on or before 31 March 2030.

Paragraph 2 — Definitions: 'associate' (15% threshold), 'connected person' (s. 184(5) reference), 'corpus', 'entity', 'specified regulations' (SEBI PMS / IA Regulations).

BLOCK 2 : CORRESPONDING PROVISION IN OLD ACT (1961)

Section 9A of the 1961 Act

Section 9A — 'Certain activities not to constitute business connection in India.' Inserted by FA 2015. Sub-sections (1)-(8). Identical 13-condition test for eligible investment fund + 4-condition test for eligible fund manager. The 5%-25%-50%-100-crore-25-member-10%-of-fund-and-20%-profit-share architecture is preserved verbatim. Annual reporting under sub-section (5).

BLOCK 3 : COMMENTARY

Schedule I implements one of the most important fund-management regime provisions in Indian tax law — the so-called 'Investment Manager Regime' (IMR). The regime was inserted in 2015 to address the long-standing concern that hedge funds / private equity funds / mutual funds located abroad would be deemed to have a 'business connection' in India (and therefore tax exposure) merely because their fund manager — a SEBI-registered Indian-resident investment adviser — performs decisions in India. The regime exempts such activities from the business connection net, provided the fund satisfies the 13 conditions and the manager satisfies the 4 conditions.

Why this matters. Without Schedule I (and old s. 9A), Indian-resident fund managers would not be appointed by foreign funds — international fund houses would rather locate the management activity in Mauritius / Singapore / London than risk an Indian PE / business connection. The IMR provision was specifically designed to attract fund management activity onshore. India's GIFT City IFSC has, in particular, leveraged this regime.

The 13 fund-side conditions in granular detail. (a) Non-Indian resident — gating. (b) DTAA-jurisdiction or notified-jurisdiction — anchors investor protection assumption. (c) 5% Indian-resident participation cap — anti-roundtripping; carve-out for fund manager's seed capital up to Rs 25 crore in first 3 years (added by FA 2018 to enable Indian managers to put 'skin in the game'). (d) Foreign investor-protection regulation — quality assurance. (e) 25-member minimum + non-connected — ensures broad pooling, not single-investor structure. (f) 10% individual cap — anti-concentration. (g) 50% top-10-cap — anti-concentration at top. (h) 25% single-entity cap — anti-concentration at investee level. (i) No associate investment — anti-self-dealing. (j) Rs 100 crore monthly average — material-fund threshold. (k) No India business control — fund is passive; only investments. (l) No India business connection except via manager — single-channel rule. (m) Arm's length manager remuneration — anti-fee-stripping.

The 4 manager-side conditions. (a) Independence from fund — no employee / connected. (b) SEBI registration as PMS / Investment Adviser. (c) Ordinary course of business — no exclusive engagement. (d) 20% profit-share cap — prevents disguised distribution.

FA 2018 / FA 2019 / FA 2024 amendments preserved. The 25-crore seed capital carve-out (FA 2018), the 4-month grace period for breach (FA 2018), the carve-out from member-related conditions for sovereign / government / central bank funds (FA 2018), and the IFSC-fund-manager carve-out (FA 2019, extended to 31-3-2030 by FA 2024) — all preserved in this Schedule.

Annual compliance — Paragraph 1(4). Statement in prescribed form within 90 days of tax year end. Form to be prescribed (similar to the old Form 3CEJ under Rule 10V). Practitioner must coordinate with fund manager / fund administrator for annual filing; non-filing forfeits the regime.

Practitioner takeaways. (i) For Indian fund managers being appointed by foreign funds: at the negotiation stage, verify that the fund will satisfy each of the 13 conditions; lock the manager's profit share at not exceeding 20% in the management agreement; ensure the manager remuneration is at arm's length (Rule prescribes the formula). (ii) For Indian residents investing in foreign funds: monitor the 5% cap; if breach occurs, ensure rectification within 4 months. (iii) For IFSC fund managers: leverage the carve-out under Paragraph 1(6) — many of the 13 conditions can be relaxed for IFSC-located managers. (iv) For FA 2024 sunset: Paragraph 1(6) extension expires 31 March 2030; revival or further extension expected as part of GIFT City strategy. (v) Coordinate with Rule 9 (NR income computation) and section 158 (DTAA) — even where Schedule I exempts business connection, treaty PE / SEP analysis must be conducted independently.

Continuity of jurisprudence. CIT v. Visakhapatnam Port Trust (1983) 144 ITR 146 (AP) — meaning of 'business connection' — continues to apply. CBDT Circulars 03/2017 and the FAQs issued under old section 9A continue to provide useful interpretative guidance until re-issued under Schedule I.

SCHEDULE II — Income Not to be Included in Total Income

Statutory anchor: Section 11 of the Act

Schedule II is the principal exempt-income table for general assessees. It implements section 11(1) of the new Act and replaces the long enumerative section 10 of the 1961 Act. The Schedule is organised as a 3-column Table: Sl. No. / Income (column B) / Conditions (column C). Approximately 40+ entries cover the full range of general exempt incomes for individuals, HUFs, firms, companies, and other assessees.

BLOCK 1 : SCHEDULE STRUCTURE — KEY ENTRIES

Schedule II — [See section 11]

Paragraph: 'In computing the total income of a person for a tax year, the income mentioned in column B of the Table below shall not be included, subject to fulfilment of the conditions mentioned in column C of the said Table.'

Indicative list of major exempt-income entries (illustrative; the full Table contains 40+ rows):

Sl. No. 1 — Agricultural income — Nil conditions.

Sl. No. 2 — Life insurance policy proceeds (with bonus) — conditions vary by date of issue: pre-2003 (no conditions); 1-4-2003 to 31-3-2012 (premium-to-sum-assured ratio ≤ 20%); 1-4-2012 to 31-3-2013 (≤10%); 1-4-2013 to 31-1-2021 (≤15% special policy / ≤10% other); 1-2-2021 to 31-3-2023 (ULIPs — 15%/10% + Rs 2.5 lakh aggregate cap); on or after 1-4-2023 (similar with FA 2023 thresholds for non-ULIPs).

Sl. No. 3-7 — Various retirement / employment-related — Gratuity (s. 19 [Table Sl. No. 3-6] = old s. 10(10)); Leave encashment (= old s. 10(10AA)); Retrenchment compensation (= old s. 10(10B)); VRS / Voluntary separation (= old s. 10(10C)) — Rs 5 lakh cap; Pension commutation (= old s. 10(10A)).

Sl. No. 8-12 — Provident fund / superannuation withdrawals (= old s. 10(11), (12), (12A), (13)).

Sl. No. 13 — HRA (= old s. 10(13A)).

Sl. No. 14 — Special allowances (= old s. 10(14)) — children education / hostel / uniform / conveyance / travel etc.

Sl. No. 15-20 — Government / specified bond interest; tax-free bonds (= old s. 10(15)); awards / scholarships; gallantry awards; UN officials etc.

Sl. No. 21-25 — Senior citizen savings / Sukanya Samriddhi / specified investments.

Sl. No. 26-32 — Local authority / Reserve Bank / specified body / mutual fund certain incomes.

Sl. No. 33-40+ — Various special exemptions including: (a) Capital gains on listed equity STT-paid (now governed by section 196 special-rate); (b) Mutual fund / units; (c) Specified securitisation trust; (d) Certain royalty / FTS; (e) Anonymous donations carve-outs; (f) Dividend (specified categories — though most dividend now taxable in shareholder's hands post FA 2020); (g) Capital gains of certain non-residents; etc.

BLOCK 2 : CORRESPONDING PROVISION IN OLD ACT (1961)

Section 10 of the 1961 Act — 'Incomes not included in total income'

Long enumerative section with 50+ clauses, accumulated over 60 years of amendments. Included: (1) agricultural income; (2) HUF receipts; (2A) firm partner share; (5) LTC; (10) gratuity; (10A) commutation of pension; (10AA) leave encashment; (10B) retrenchment; (10BB) IIT/IIM compensation; (10C) VRS; (10CC) tax on perquisites; (10D) life insurance; (11)/(12)/(12A)/(12B)/(13) PF / RPF / unrecognised PF / superannuation; (13A) HRA; (14) special allowances; (15) bond interest; (15A) interest on tax-free securities; (17)/(17A) MP/MLA pensions/awards; (18) pension to gallantry award winners; (19) family pension to gallantry award winners; (20) local authority; (20A) housing authority; (23A) professional association; (23B) Khadi industries; (23BB) AICTE; (23BBA) statutory bodies; (23BBE) IRDA; (23BBG) Central Electricity Regulatory; (23BBH) Prasar Bharati; (23C) educational/medical institution; (23D) mutual funds; (23DA) securitisation trust; (23E) sports body; (23EA)/(23EB)/(23EC) various Funds; (23ED)/(23EE) Investor Protection / Core Settlement; (23F) approved investment fund; (23FB) venture capital fund; (23FBA)/(23FBB) Cat I/II AIF; (23FBC) AIF unit-holder; (23FC)/(23FCA)/(23FD) business trust / REIT / InvIT; (23FE) sovereign wealth fund / specified pension fund; (23FF) IFSC; (24) provident fund withdrawals; (25)/(25A) trade union / sportspersons; (26)/(26A)/(26B)/(26AAA)/(26AAB) tribal areas / scheduled tribes; (27)/(28)/(29) statutory corporations; (30)/(31)/(32) tea/coffee/cocoa marketing boards; (33) unit-trust capital gains; (34) dividend [omitted by FA 2020]; (34A) buy-back distribution tax payment by company [largely omitted post FA 2024]; (35) MF unit income; (35A) infrastructure debt fund unitholder; (36) capital gains in transition; (37) compulsory acquisition compensation; (38) listed equity capital gains [omitted by FA 2018]; (39) sportspersons; (40)/(41)/(42) various transition exemptions; (43) reverse mortgage; (44) NPS Trust income; (45) Central Government employee perquisite cap; (46) specified body / authority; (47) infrastructure debt fund; (48) royalty/FTS by foreign company under specified arrangement; (49) compensation in lieu of pension to retired members of certain defence services; (50) net agricultural income for rate purposes.

BLOCK 3 : COMMENTARY

Schedule II is the most-consulted Schedule of the entire Act. Every salaried employee, every business assessee, every senior citizen, every NRI consults Schedule II for at least one exemption claim every year. The Schedule re-organises the chaotic 50-clause section 10 of the 1961 Act into a single Table, dramatically improving readability.

Drafting innovation: Table format vs enumerative section. The Table format (three columns: Sl. No. / Income / Conditions) makes the relationship between exempt income and its conditions visually clear. Under section 10 of the 1961 Act, conditions were buried in long provisos and Explanations to each clause. The new format compresses everything into one cell per condition. For example, life insurance proceeds (Sl. No. 2) — a single Table cell now contains the complex period-based premium-to-sum-assured ratio test that had been spread across multiple Explanations to old s. 10(10D).

Major substantive content preserved. Each major exempt-income category of old s. 10 has been preserved with its conditions:

Agricultural income (Sl. No. 1). Definition continues to flow from section 2(5) of the new Act (formerly s. 2(1A)). Schedule II merely confirms exemption with no further conditions. The integrated reading with section 2(5), section 9 (income deemed to accrue), and the urban-agricultural-land carve-out under section 2(22)(iii) (formerly s. 2(14)(iii)) governs whether income qualifies as agricultural.

Life insurance maturity proceeds (Sl. No. 2). The most-amended exemption in tax history. Conditions are date-of-issue based — older policies grandfathered with relaxed conditions, newer policies subject to premium-to-sum-assured ratio caps and post-FA 2021 / FA 2023 caps on aggregate annual premium for ULIPs (Rs 2.5 lakh) and non-ULIPs (Rs 5 lakh). Schedule II preserves all these tiered conditions verbatim. Practitioner must check (a) date of policy issue, (b) policy type (ULIP / non-ULIP / specified / other), (c) premium-to-sum-assured ratio, (d) aggregate annual premium cap, before treating maturity proceeds as exempt.

Retirement benefit exemptions (Sl. Nos. 3-7). Gratuity exemption — least of (i) actual / (ii) Rs 20 lakh / (iii) 15-day-formula. Leave encashment exemption — least of (i) actual / (ii) Rs 25 lakh (FA 2023 cap; up from Rs 3 lakh) / (iii) 10-month formula. Retrenchment compensation — least of (i) actual / (ii) Rs 5 lakh / (iii) Industrial Disputes Act formula. VRS / VR — least of (i) actual / (ii) Rs 5 lakh / (iii) 3-month-salary-per-year-or-balance-of-service. All preserved in Schedule II. Note: The integrated commentary on these is in Volume IV, Section 19 of the Act commentary.

HRA (Sl. No. 13). Least of (i) actual HRA, (ii) 50% of salary (Mumbai/Delhi/Chennai/Kolkata) / 40% of salary (other cities), (iii) actual rent paid less 10% of salary. Critical for salaried employees — payroll teams must apply correctly.

Special allowances (Sl. No. 14). The 'fixed-amount' exemption for various allowances (children education Rs 100/month/child; hostel allowance Rs 300/month/child; conveyance for handicapped Rs 3,200/month; uniform allowance — actual used; etc.). Rule prescribes the amounts.

Section 10(23C) institutional exemptions migrated. The educational institution / medical institution exemption regime under old s. 10(23C) — covering universities, hospitals, charitable trusts with annual receipts up to Rs 1 crore (sub-iiiad/iiiae) and notified institutions (sub-iv/v/vi/via) — has been migrated to Schedule VII (persons exempt from tax) read with Chapter XVII (charitable trust regime). Schedule II does not duplicate.

Mutual fund / business trust / AIF / REIT / InvIT / sovereign wealth fund / IFSC / specified bonds. These specialised exemptions migrated to Schedules III (eligible persons), IV (NR / foreign companies), V (investment funds), VI (IFSC) — covered in subsequent volumes. Schedule II is general; specialised entities consult their dedicated Schedule.

Practitioner takeaways. (i) Maintain a Schedule II quick-reference (each entry mapped to old s. 10 sub-clause and to current Rule mechanic). (ii) For salaried clients: HRA, gratuity, leave encashment, retrenchment, VRS — verify against current FA-amended limits. (iii) For senior citizens / pensioners: pension commutation (gratuitous vs proportionate); family pension under s. 92 (Other Sources); specified investments. (iv) For NRIs / OCIs: NRO interest, NRE interest, FCNR interest — specified bond exemptions; integrate with section 5 scope analysis. (v) For employers: leverage the inclusive list — provide perquisites that fall within Schedule II carve-outs (e.g., children education allowance) rather than monetary salary.

Schedules I & II — At a Glance

Practitioner notes

• Schedule I: file annual statement within 90 days of tax year end (Paragraph 1(4)); engage with fund manager early.
• Schedule II: maintain quick-reference card for top 20 exempt incomes; track FA amendments to thresholds annually.
• Life insurance Sl. No. 2: verify policy issue date and type (ULIP / non-ULIP) before treating as exempt; post-FA 2023 high-premium policies may attract capital gains computation.
• Gratuity / leave encashment / VRS: integrated reading with section 19 [Table] of the Act.
• Specialised exempt incomes: refer to Schedules III-VI for AIF / REIT / IFSC / NR exempt incomes.

— End of Schedules Volume 1 —