1. The Importance of Schedule II
Schedule II of the Income Tax Act, 2025 lists incomes that are specifically exempt from tax — they are received but not included in the total income for computing tax liability. Understanding Schedule II is essential because: (a) exempt incomes must still be reported in the ITR for transparency; (b) not all incomes that appear in AIS are taxable — Schedule II items create legitimate mismatches; and (c) claiming the wrong exemptions leads to notices.
2. Agricultural Income
Agricultural income as defined under Section 2(1A) — rent or revenue from agricultural land, income from agriculture, income from farm buildings used for agriculture — is fully exempt under Schedule II. However, partial integration applies when both agricultural and non-agricultural income exists: agricultural income is added to non-agricultural income only for rate determination (pushes the non-agricultural income into higher slabs), but the agriculture income itself is not taxed.
3. Retirement and Employment Benefits
| Item | Exemption | Conditions |
|---|---|---|
| Gratuity | Up to Rs 20L (non-govt); fully exempt (govt) | Payment of Gratuity Act / 5+ years service |
| Leave encashment at retirement | Up to Rs 25L (non-govt); fully exempt (govt) | At retirement/superannuation |
| VRS compensation | Up to Rs 5L | CBDT guidelines; 40 years age or 10 years service |
| Commuted pension (non-govt) | 1/3 (with gratuity); 1/2 (without) | From approved pension fund |
| Retrenchment compensation | Up to Rs 5L or notified limit | Industrial Disputes Act provisions |
4. Investment Income Exemptions
| Item | Exemption |
|---|---|
| PPF interest and maturity | Fully exempt (EEE) |
| EPF maturity (after 5 years) | Fully exempt |
| NRE account interest | Fully exempt |
| FCNR (B) account interest | Fully exempt |
| SGB maturity (after 8 years via RBI) | Capital gains fully exempt |
| Tax-free bonds interest (NHAI, IRFC, NHB) | Fully exempt |
| Long-term bonds held to maturity (notified) | Fully exempt |
| Life insurance maturity/death claim | Exempt (conditions below) |
5. Life Insurance Maturity: Conditions for Exemption
Life insurance maturity proceeds are exempt under Schedule II subject to these conditions:
- Policy issued before 1 April 2012: premium must not exceed 20% of sum assured
- Policy issued between 1 April 2012 and 31 March 2023: premium must not exceed 10% of sum assured
- Policy issued after 1 April 2023: maturity exempt only if annual premium does not exceed Rs 5 lakh — otherwise fully taxable
- Death benefit: always exempt regardless of premium amount
6. Gifts and Inheritances
- Gifts received from relatives (spouse, parents, siblings, grandparents, children) — fully exempt regardless of amount
- Gifts received on occasion of marriage — fully exempt from anyone
- Gifts received by will or inheritance — fully exempt
- Gifts in contemplation of death — fully exempt
- Gifts from charitable institutions or local authorities — fully exempt
7. Education and Scholarship Exemptions
- Scholarships granted for educational purposes — fully exempt under Schedule II
- Awards from government or notified bodies for scientific, literary, or artistic achievement — exempt if notified by Central Government
- Educational allowances for children: Rs 100/month per child (up to 2 children) — minor allowance for employed parents
- Hostel expenditure allowance: Rs 300/month per child (up to 2 children)
8. HUF Member Share and Partition
Income received by a member of an HUF as a share of HUF income is fully exempt — the income is already taxed in the HUF hands (Section 86 equivalent). Upon HUF partition, assets received by coparceners are not taxable — partition is not a transfer. Capital gains on partition: nil.
9. Other Notable Exemptions
- Income of Member of Parliament and State Legislature: daily allowance — exempt
- Supreme Court and High Court judge salaries: partially exempt
- Income of registered trade unions: subject to conditions
- Long-term capital gains on transfer of urban agricultural land if reinvested in agricultural land within 2 years (Section 54B)
- Capital gains on compulsory acquisition of urban agricultural land
10. Why TaxClue
Schedule II exemptions are nuanced — especially for life insurance post-April 2023, partial integration of agricultural income, and HUF member distributions. Incorrect reporting of exempt income can lead to notices. TaxClue ensures Schedule II items are correctly handled in every ITR. Contact us for comprehensive ITR filing under ITA 2025.