Exempt Income of Eligible Persons: Schedule III of the Income Tax Act 2025 Explained

Schedule III of the Income-tax Act, 2025 lists income that is left out of total income, but only for the eligible person named against it and only if the stated conditions are met. Section 11(1) is the rule that gives the Schedule its effect. If a condition fails in a tax year, section 11(2) brings that income back into tax for that year.

This guide explains how to read the Schedule's table, what the entries cover, and how to test a claim. Everything is taken from section 11 and Schedule III as amended by the Finance Act, 2026 (tax year 2026-27 onwards). It is general information, not tax advice.

What is Schedule III and how does section 11 use it?

Section 11(1) says that, when computing the total income of any person for a tax year, income listed in Schedules II, III, IV, V and VI is not included, subject to the conditions in those Schedules. Schedule III is one of these five. Its heading is "Income not to be included in total income of eligible persons".

Section 11(2) is the other half. Where the conditions are not satisfied in a tax year for an income listed in these Schedules, that income is charged to tax on the total income for that year. Section 11(5) lets the Central Government make rules or issue notifications for the purposes of the Schedules.

Schedule VII works differently. Section 11(3) and (4) deal with persons who are not chargeable to tax on their total income, subject to conditions. Schedule III is about specific incomes of specific persons.

How do I read the Schedule III table?

The table has four columns, and a claim works only if all four line up.

Column	What it tells you	Example (Sl. No. 2)
A: Sl. No.	The entry number. Cite it when you claim.	2
B: Income not to be included	The income that is left out	Sum received by a partner towards his share in the total income of the firm
C: Eligible persons	Who may claim it	A partner of a firm separately assessed as such
D: Conditions	What must be true, or "Nil" if none	The sum is as per the profit-sharing ratio in the partnership deed

The conditions are tested every tax year. Section 11(2) refers to conditions not being satisfied "in any tax year", so a claim that worked last year can fail this year.

Which incomes does Schedule III cover?

The table runs from Sl. No. 1 to 39, with additions numbered 38A to 38D. Grouped by the kind of person, it covers:

Group	Sl. Nos.	Examples of what is left out
Family and partnership	1, 2, 17	Sum received by an HUF member out of family income; a partner's share of profit; up to Rs 1,500 of each minor child's clubbed income
Disasters, pension, accidents	3, 4, 38B	Disaster compensation from government; NPS partial withdrawal; interest on Motor Accident Claims Tribunal compensation
Legislators	5, 6, 7	Daily, constituency and other allowances by reason of membership of Parliament or a State Legislature
Employees and allowances	8 to 13	Travel concession; government allowances for service outside India; employer-paid tax on a non-monetary perquisite; rent, duty and cost-of-living allowances to the prescribed extent
Armed forces and gallantry	14, 15, 16, 38, 38A	Pension of gallantry award winners; family pension; gratuity to a deceased employee's widow, children or dependants; disability pension of those invalided out
Land and capital gains	18, 38C, 38D	Capital gains on certain agricultural land transfers; compulsory acquisition awards under the 2013 land acquisition law; Andhra Pradesh land pooling gains
Regions and communities	19, 20	Income of Scheduled Tribe members in specified areas; income of a Sikkimese from Sikkim sources and from dividend or interest on securities
Business subsidies and local bodies	21, 22	Replantation subsidy for tea, rubber, coffee, cardamom; a local authority's income from specified supplies
Associations and funds	23 to 32	Approved research association; professional associations; khadi institutions; securitisation trust; exchange and depository funds; trade unions; provident funds
Notified bodies and events	33 to 37	International sporting events in India; treaty bodies; statutory regulators; reverse mortgage loan amounts; Indian Strategic Petroleum Reserves Limited
Carry-over of old exemptions	39	Income covered by the 1961 Act provisions the entry names, subject to the conditions given there

Is a share of profit received by a partner taxable?

Under Sl. No. 2, a partner of a firm that is separately assessed does not include the share of profit received from the firm, provided the sum follows the profit-sharing ratio in the partnership deed. The firm pays its own tax on its income, so the same profit is not taxed twice. This entry covers the profit share only. Remuneration and interest to partners are not covered by this entry, so check how they are treated separately.

What is excluded for a member of a Hindu undivided family?

Sl. No. 1 leaves out any sum an individual member receives from the HUF, if it is not covered by section 99(3) and (4) and is paid out of the income of the family, or of the estate belonging to the family in the case of an impartible estate. The conditions are about how the sum is treated under the clubbing rules and where the payment comes from, not about its size.

How much of a minor child's income can be excluded?

Section 99(1)(c) brings certain income of a minor child into the parent's total income. Sl. No. 17 lets the individual leave out such income up to Rs 1,500 for each minor child.

How much can I withdraw from NPS without it being taxed?

Sl. No. 4 covers payments from the National Pension System Trust under section 124. It applies to an employee, or to a guardian or parent of a minor. There are two conditions: the payment is a partial withdrawal made as the Pension Fund Regulatory and Development Authority Act, 2013 and its regulations permit, and the amount excluded does not exceed 25% of the contributions made by the person.

Worked examples with figures (tax year 2026-27)

Example 1: minor children's income under Sl. No. 17

Assumptions: Meena is an individual whose two minor children have income that section 99(1)(c) adds to her total income. Child A earned Rs 4,200 and Child B earned Rs 900. The exclusion is up to Rs 1,500 per child, and I read it as the lower of the income and Rs 1,500.

Step	Child A	Child B
Income includible under section 99(1)(c)	Rs 4,200	Rs 900
Excluded under Sl. No. 17 (lower of income and Rs 1,500)	Rs 1,500	Rs 900
Added to Meena's total income	Rs 4,200 - 1,500 = Rs 2,700	Rs 900 - 900 = Rs 0

Total added to Meena's income: Rs 2,700 + Rs 0 = Rs 2,700. The unused Rs 600 of Child B's limit cannot be moved to Child A, because the limit is per child.

Example 2: NPS partial withdrawal ceiling under Sl. No. 4

Assumptions: Ravi, an employee, has contributed Rs 6,00,000 of his own money to his NPS account in total. He makes a partial withdrawal permitted by the PFRDA regulations in 2026-27.

1. Ceiling: 25% of Rs 6,00,000 = Rs 6,00,000 x 25 / 100 = Rs 1,50,000.
2. Withdrawal of Rs 1,20,000: below the ceiling, so Rs 1,20,000 is not included in total income.
3. If a withdrawal were Rs 1,80,000, the exclusion could not go past Rs 1,50,000. The Schedule does not exclude the remaining Rs 30,000, so check how that part is treated.

Example 3: partner's profit share under Sl. No. 2

Assumptions: A separately assessed firm has Rs 10,00,000 of income after its own tax. The deed gives Anil 60% and Sunita 40%.

Partner	Ratio in deed	Share (Rs 10,00,000 x ratio)	Included in own total income
Anil	60%	Rs 6,00,000	Nil (Sl. No. 2 met)
Sunita	40%	Rs 4,00,000	Nil (Sl. No. 2 met)

The condition is that the sum follows the ratio in the deed. If the partners agree to share in a different ratio without changing the deed, the condition fails and section 11(2) applies.

Real-life examples

Ravi, HUF member. His family HUF pays him Rs 2,40,000 out of the HUF's own income for his expenses. This is a sum received by a member out of family income, so under Sl. No. 1 he does not include it, as long as section 99(3) and (4) do not cover it.

Tashi, Scheduled Tribe member in Mizoram. He is a Scheduled Tribe member residing in Mizoram, one of the States named against Sl. No. 19. Income that accrues or arises from any source in the specified areas, and dividend or interest on securities, is excluded with no further condition ("Nil"). If he moved out of the listed areas, he would no longer be the eligible person described in column C.

Kamla, widow of an employee. Her husband died in service. The gratuity computed under section 19(1), Table Sl. No. 3.C to 6.C, paid to her under Sl. No. 38 is not included, with no condition attached.

A local authority supplying water. Under Sl. No. 22, a local authority's trade or business income is excluded if it comes from supplying a commodity or service, other than water or electricity, within its own jurisdictional area, or water or electricity within or outside it. Other trade or business income does not fit this entry.

Common mistakes

• Claiming without being the eligible person. Column C is strict. A note about a partner's share does not help a person who is not a partner of a separately assessed firm.
• Ignoring column D. "Nil" means no conditions. Anything else is a condition to document, for example an approval, a certificate, or a deed ratio.
• Treating Notes as optional. The Notes below the table define terms. "Family" in Sl. Nos. 8 and 15, "Sikkimese" in Sl. No. 20 and "local authority" in Sl. No. 22 all have meanings fixed by the Notes.
• Forgetting prescribed limits. Several entries (Sl. Nos. 8, 11, 12, 13, 16) apply "as may be prescribed". Read the rules for the amount before you exclude anything.
• Assuming the exemption is permanent. Section 11(2) tests each tax year separately. Approvals and notifications can lapse or be withdrawn.
• Stretching an entry to a different person. Sl. No. 20 is for an individual who is a Sikkimese as defined in Note 4, not for any entity located in Sikkim.

Quick reference

Item	Limit or test	Entry
Minor child's income	Up to Rs 1,500 per child	Sl. No. 17
NPS partial withdrawal	Up to 25% of own contributions	Sl. No. 4
Partner's profit share	Per ratio in partnership deed	Sl. No. 2
Khadi institution approval	Approved by the Khadi and Village Industries Commission for a period not exceeding three tax years at a time	Sl. No. 25
Land pooling (Andhra Pradesh)	Possession of reconstituted plot on or before 31 March 2031; owner on 2 June 2014	Sl. No. 38D
Strategic crude oil arrangement	Crude oil replenished within three years from the end of the tax year of first removal	Sl. No. 37
Conditions fail in a tax year	Income charged to tax for that year	Section 11(2)

Where this is in the Act

• Section 11(1) and (2): income not included, and the consequence of failing a condition
• Section 11(5): power to make rules and notifications
• Schedule III, Sl. Nos. 1 to 39 (with 38A to 38D) and Notes 1 to 13
• Section 99(1)(c), (3) and (4): clubbing, relevant to Sl. Nos. 1 and 17
• Section 124: National Pension System, relevant to Sl. No. 4
• Section 19(1), Table Sl. No. 3.C to 6.C: gratuity, relevant to Sl. No. 38
• Section 350: permitted investment modes, relevant to Sl. No. 23

For the wider picture, read the complete list of exempt income and, for land transfers, exemption on agricultural land transfer.

For a CA firm, the work is spotting which client's income sits in Schedule III and keeping the supporting papers (deed, certificate, approval) on file. Finexo's practice management software helps you track client documents and deadlines across your practice. It does not decide eligibility for you.