Schedule I of the Income-tax Act, 2025 is read with section 9(12) and sets out the conditions under which the activities of an eligible investment fund do not constitute a business connection in India. Exempt income is in Schedules II to VII.
Schedule I is not a list of exempt income. It is headed 'Conditions for certain activities not to constitute business connection in India' and is read with section 9(12). Exempt income is dealt with in section 11 read with Schedules II to VII.
What Schedule I is for
Schedule I is a fund-management safe harbour, not an exemption list. It answers a narrow question: when does the activity of an offshore fund, carried out through a fund manager in India, not create a business connection in India for the fund?
It is read with section 9(12), which sits in the deemed-accrual section. Without the safe harbour, a fund manager operating from India could constitute a business connection, bringing the offshore fund's income into the Indian net under section 9.
The confusion arises because the 1961 Act had section 10 as its exemption section, and readers assumed the new Act's first Schedule would carry the same ground. It does not. Exemptions moved to Schedules II to VII, split by who is claiming.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026 because of the repeal and savings provision in section 536. The Schedule contents described here are taken from the Act as enacted, incorporating the corrigenda notified in the Gazette on 3 September 2025.
Where each provision actually sits
| Topic | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Fund management safe harbour | Section 9A | Section 9(12) read with Schedule I |
| Exempt income, general | Section 10 | Section 11 read with Schedule II |
| Exempt income of eligible persons | Section 10 clauses | Schedule III |
| Exempt income of non-residents | Section 10 clauses | Schedule IV |
| Investment funds and business trusts | Sections 10(23FB) and similar | Schedule V |
| IFSC unit exemptions | Section 10(4D) and similar | Schedule VI |
| Persons wholly exempt | Section 10 clauses | Schedule VII |
The conditions in Schedule I
What an eligible investment fund is
Paragraph 1(1) defines it as a fund established, incorporated or registered outside India which collects funds from its members for investing for their benefit, and which satisfies the conditions that follow. The fund must not be a person resident in India.
The residence and treaty condition
The fund must be a resident of a country or specified territory with which an agreement under section 159(1) or (2) — a tax treaty — has been entered into, or must be established, incorporated or registered in a country or specified territory notified for this purpose.
The 5% Indian participation cap
Aggregate participation or investment in the fund, directly by persons resident in India, must not exceed 5% of the corpus of the fund as on 1 April and 1 October of the tax year. The Schedule then sets out how that percentage is computed.
The remaining conditions and reporting
The Schedule continues with further conditions on the fund's constitution, membership, activity and the fund manager, and requires the fund to furnish prescribed information and documents on fulfilment of the conditions. Paragraph 1(5) applies the Schedule as per Board guidelines, and paragraph 1(6) lets the Central Government notify that specified conditions shall not apply.
Where exempt income actually lives
If you came here looking for exempt income, the provision is section 11, and the lists are in Schedules II to VII. Schedule II is the general list, Schedule III covers eligible persons, Schedule IV eligible non-residents and foreign companies, Schedule V investment funds and business trusts, Schedule VI IFSC units, and Schedule VII lists persons who are exempt rather than kinds of income.
Worked example
A fund registered in a treaty country appoints a fund manager in Mumbai in tax year 2026-27.
| Question | Answer |
|---|---|
| Does the Mumbai manager's activity create a business connection for the fund? | Not if the conditions in Schedule I are met — section 9(12) |
| Is the fund a resident of a treaty country? | Required by paragraph 1(1)(b)(i), or it must be in a notified country |
| Indian residents hold 3.8% of the corpus on 1 April and 4.6% on 1 October | Within the 5% cap in paragraph 1(1)(c) |
| Indian residents hold 6.2% on 1 October | Condition failed — the safe harbour is unavailable for that year |
| Is any of the fund's income exempt because of Schedule I? | No. Schedule I only prevents a business connection arising; it grants no exemption |
That last row is the practical point. Schedule I is about nexus, not exemption. If a business connection is avoided, income does not accrue in India under section 9 in the first place — which is a different mechanism from an exemption under section 11.
Compliance checklist
- Test the fund against every condition in paragraph 1 of Schedule I, not just the residence test.
- Measure Indian resident participation on both 1 April and 1 October of the tax year against the 5% cap.
- Confirm the fund is resident in a treaty country under section 159, or in a notified country or territory.
- Furnish the prescribed information and documents on fulfilment of the conditions.
- For exempt income, read section 11 with Schedules II to VII — not Schedule I.
- Check any Central Government notification under paragraph 1(6) disapplying particular conditions.
Common mistakes
- Treating Schedule I as the successor to section 10 of the 1961 Act. It is not; section 11 with Schedules II to VII is.
- Testing the 5% participation cap only once in the year rather than on both prescribed dates.
- Assuming Schedule I exempts the fund's income; it only prevents a business connection from arising.
- Looking for HRA, gratuity or allowance exemptions here — those are in section 19.
All sixteen Schedules of the Income-tax Act, 2025
Because the numbering is widely misquoted, the full list is reproduced below from the Act as enacted. Note that Schedules II to VII are all exemption lists, split by who is claiming rather than by what the income is.
| Schedule | Read with | Subject as enacted |
|---|---|---|
| I | section 9(12) | Conditions for certain activities not to constitute business connection in India |
| II | section 11 | Income not to be included in total income |
| III | section 11 | Income not to be included in total income of eligible persons |
| IV | section 11 | Income not to be included in total income of eligible non-residents, foreign companies and other such persons |
| V | section 11 | Income not to be included in total income of certain eligible persons including investment funds, business trusts and their unit holders |
| VI | section 11 | Income not to be included in total income of certain eligible persons in an International Financial Services Centre or having income therefrom |
| VII | section 11 | Persons exempt from tax |
| VIII | section 12 | Income not to be included in the total income of political parties and electoral trusts |
| IX | section 48 | Deduction for tea, coffee and rubber development accounts |
| X | section 49 | Deduction for Site Restoration Fund |
| XI | section 2(91) | Recognised provident funds, approved superannuation funds and approved gratuity funds |
| XII | section 51 | Minerals, and groups of associated minerals |
| XIII | section 45(2) | List of articles or things |
| XIV | section 55 | Insurance business |
| XV | section 123 | Deduction for life insurance premia, contribution to provident fund, subscription to certain equity shares, etc. |
| XVI | section 350 | Permitted modes of investment or deposits by a registered non-profit organisation |
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.