You can use ignore on an element in a handler to skip the element. The element needs to be the current one or one of its ancestors. That means that you can set a handler on level3/name, check whether you want to keep the element or not there, and skip the entire level3 element if you want to:

#!/usr/bin/perl

use strict;
use warnings;
 
use XML::Twig;

XML::Twig->new( twig_handlers => { 'level3/name' => sub { if( $_->text
+ !~ m{^include}) { $_->parent->ignore; } },
                                   level3        => sub { print "eleme
+nt processed:\n", $_->sprint, "\n"; }
                                 },
              )
         ->parse( \*DATA);

__END__
<level1>
  <level2>
    <level3>
       <name>include</name>
       <rule>included rule 1</rule>
       <rule>included rule 2</rule>
    </level3>
    <level3>
       <name>exclude</name>
       <rule>excluded rule</rule>
       <rule>excluded rule</rule>
    </level3>
  </level2>
</level1>
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Does this help?