Exempt Incomes under Section 11 + Schedule II | Complete Guide to Tax-Free Income

Key Takeaways

• Section 11 read with Schedule II of the Income Tax Act, 2025 lists specific incomes that are wholly or partially exempt from tax, reducing your total taxable income. (Previously Section 10 of the Income Tax Act, 1961.)
• Agricultural income under Schedule II is fully exempt but is considered for rate purposes if net agricultural income exceeds Rs. 5,000.
• HRA exemption under Schedule II (Sl. No. related to house rent allowance) is one of the most commonly claimed exemptions by salaried individuals.
• Gratuity, leave encashment, and pension commutation have prescribed limits for non-government employees as specified in Schedule II.
• Under the new tax regime (Section 202), most Schedule II exemptions are NOT available except a few specified ones.

Agricultural Income - Schedule II (Agricultural Income Entry)

Agricultural income is completely exempt from income tax under Schedule II of the Income Tax Act, 2025. This includes:

• Income from cultivation of land (rent or revenue from agricultural land)
• Income from agricultural operations (processing to make produce fit for market)
• Rent from agricultural land
• Income from farmhouse (subject to conditions)

Partial integration rule: If non-agricultural income exceeds the basic exemption limit and net agricultural income exceeds Rs. 5,000, agricultural income is integrated for rate calculation purposes only.

HRA Exemption - Schedule II (House Rent Allowance Entry) with Rule 2A of Income Tax Rules, 2026

The least of the following three amounts is exempt:

1. Actual HRA received from employer
2. Rent paid minus 10% of salary
3. 50% of salary (metro cities: Mumbai, Delhi, Kolkata, Chennai) or 40% of salary (non-metro)

Salary for HRA purposes means Basic Pay + Dearness Allowance (if forming part of retirement benefits) + Commission (if fixed percentage of turnover).

Leave Travel Allowance - Schedule II (Leave Travel Concession Entry)

Exemption is available for travel expenses for the employee and family within India, limited to:

• Economy class airfare for air travel
• AC first class rail fare for other modes
• Available for 2 journeys in a block of 4 calendar years (current block: 2026-2029)
• Only domestic travel qualifies

Gratuity - Schedule II (Gratuity Entry)

| Category | Exemption Limit | |----------|----------------| | Government employees | Fully exempt | | Employees covered under Payment of Gratuity Act | Least of: (a) Rs. 25,00,000; (b) 15 days salary x years of service; (c) Actual gratuity | | Other employees | Least of: (a) Rs. 25,00,000; (b) Half month salary x years of service; (c) Actual gratuity |

Leave Encashment - Schedule II (Leave Encashment Entry)

For non-government employees, on retirement or superannuation, the least of:

1. Actual leave encashment received
2. 10 months average salary
3. Cash equivalent of leave standing to credit (max 30 days per year of service)
4. Rs. 25,00,000 (enhanced limit effective from Tax Year 2023-24 onwards)

Other Important Schedule II Exemptions

| Provision | Nature of Exemption | Limit/Conditions | |-----------|-------------------|-----------------| | Schedule II (Life insurance) | Sum received under life insurance policy | Exempt if annual premium does not exceed 10% of sum assured (5% for policies issued after 01.04.2012 with sum assured < 10x premium) | | Schedule II (PF payments - Sl. No. 3) | Statutory and recognised PF | Exempt on retirement after 5 years of continuous service | | Schedule II (Special allowances) | Special allowances | Children education allowance Rs. 100/month per child (max 2); hostel expenditure Rs. 300/month per child | | Schedule II (Disaster compensation) | Compensation on disaster | Fully exempt | | Schedule II (Tax on non-monetary perquisites) | Tax paid by employer on non-monetary perquisites | Exempt in hands of employee |

Landmark Judgement

Worked Example - HRA Calculation

Ms. Priya works in Mumbai with the following details for Tax Year 2025-26:

| Particulars | Monthly (Rs.) | Annual (Rs.) | |------------|--------------|-------------| | Basic Salary | 60,000 | 7,20,000 | | DA (forming part of retirement benefits) | 10,000 | 1,20,000 | | HRA received | 35,000 | 4,20,000 | | Rent paid for flat in Mumbai | 30,000 | 3,60,000 |

Salary for HRA = Basic + DA = Rs. 8,40,000 per annum

| Calculation | Amount (Rs.) | |------------|-------------| | (a) Actual HRA received | 4,20,000 | | (b) Rent paid minus 10% of salary = 3,60,000 - 84,000 | 2,76,000 | | (c) 50% of salary (Mumbai = metro) | 4,20,000 | | HRA Exempt (least of a, b, c) | 2,76,000 | | Taxable HRA | 1,44,000 |

Expert Tip

Section Interconnect

• Also read: Chapter 1 - Basis of Charge (residential status affects which exemptions apply)
• Also read: Chapter 3 - Income from Salaries (salary structure determines HRA, LTA, and gratuity computations)
• Also read: Chapter 9 - Deductions under Chapter VIII (Sections 122 to 154) (deductions work in addition to exemptions)

Frequently Asked Questions

Q1: Can I claim HRA exemption if I live in my own house and pay a home loan EMI?

No. HRA exemption under Schedule II of the Income Tax Act, 2025 requires actual payment of rent. If you own the house you live in, HRA becomes fully taxable. However, you can claim home loan interest deduction under Section 22 (previously Section 24(b)) and principal repayment under Section 123 + Schedule XV (previously Section 80C). Some taxpayers own a house in one city and rent in another due to employment - they can claim both HRA and home loan benefits simultaneously.

Q2: Is PPF maturity amount taxable?

No. The maturity proceeds of Public Provident Fund are fully exempt under Schedule II (Sl. No. 3 - Provident Fund payment) of the Income Tax Act, 2025. PPF enjoys EEE (Exempt-Exempt-Exempt) status - the contribution qualifies for deduction under Section 123 + Schedule XV, interest earned is exempt, and the maturity amount is also exempt.

Q3: Are Schedule II exemptions available under the new tax regime?

Most Schedule II exemptions like HRA, LTA, children education allowance, and special allowances are NOT available under the new tax regime (Section 202 of the Income Tax Act, 2025). However, certain exemptions like gratuity, leave encashment, VRS compensation, and employer's NPS contribution continue to be available even under the new regime.

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