Exempt Incomes Under Schedule explained: this guide covers what Exempt Incomes Under Schedule means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
1. Where the Exemptions Sit: Schedules II to VII and Section 19
Section 11 of the Income Tax Act, 2025, read with Schedules II to VII, lists incomes that are not included in the total income for computing tax liability — Schedule II for every person, Schedule III for eligible persons such as employees and HUF members, and Schedule IV for non-residents. Retirement payments such as gratuity, commuted pension and leave salary are instead deductions from salary under Section 19, and gifts from relatives are kept out by Section 92(3). Understanding where each item sits 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 — exempt items create legitimate mismatches; and (c) claiming the wrong exemptions leads to notices.
2. Agricultural Income
Agricultural income as defined under Section 2(5) — rent or revenue from agricultural land, income from agriculture, income from farm buildings used for agriculture — is fully exempt under Schedule II (Table: Sl. No. 1). 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
These are not Schedule II items. Section 19(1) allows them as deductions in computing income under the head Salaries.
| 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 | Least of the compensation received, the amount under section 25F(b) of the Industrial Disputes Act, 1947 and the notified amount | 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 from 1 April 2003 to 31 March 2012: premium to sum assured ratio must not exceed 20%
- Policy issued on or after 1 April 2012: the ratio must not exceed 10% (15% for a special policy issued on or after 1 April 2013)
- Unit linked policy issued on or after 1 February 2021: in addition, the aggregate premium must stay within Rs 2,50,000
- Other policy issued on or after 1 April 2023: in addition, the aggregate premium for all such policies must be below Rs 5,00,000 in every tax year of their term
- Death benefit: always exempt regardless of premium amount
6. Gifts and Inheritances
These are not Schedule II items. Section 92(3) keeps them outside the charge on gifts in Section 92(2)(m).
- 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 (Schedule III, Table: Sl. No. 1). 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 83)
- Capital gains on compulsory acquisition of urban agricultural land
10. Why TaxClue
These 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 exempt items are correctly handled in every ITR. Contact us for comprehensive ITR filing under ITA 2025.