For the example you give:
function index()
{
...
if ($form_validated) {
echo 'this content only';
exit; // or return IS THIS BAD???
} else {
...
}
This is normally called early exit or early return (return is more common). This can be very okay, some people say that early returns make code hard to understand but I'd say it depends on a lot more if a function can be easily read and understood or not.
So the person who decides here whether it is bad or not is you. You need to find some criteria on your own where you draw the line. For example if a function is long (more than 12 lines of code) and contains many of these early returns or even exits, this will make the code more complicated.
Generally early returns can make a functions code less complex which can heavily reduce the number of bugs.
So probably the complexity is a good criteria here.
Additionally I suggest you use exit very carefully. It does much at once and you should normally not need it within your program flow. Especially if you're writing business logic.