Income Tax Schedule 2: 2025 vs 1961 Exempt Income Comparison

Quick Answer: Schedule 2 of the Income Tax Act 2025 lists tax-exempt incomes in a clean table format, replacing the complex Section 10 of the 1961 Act. Same exemptions (agricultural income, life insurance), but 50% fewer words and much easier to understand.

We'll use Schedule II of the Income Tax Act, 2025 (effective from April 1, 2026, for tax year 2026-27) as the base, and compare it to the corresponding provisions in the old Income Tax Act, 1961.

What is Schedule 2?

Schedule 2 is the section that lists all incomes that are NOT taxed — your tax-free income. Think of it as the "exemption list" that tells you what money you can keep without paying tax.

Quick Context for Beginners

In the new Income Tax Act, 2025, Schedule II lists incomes not included in total income (i.e., exempt incomes). It uses a clean table format with columns for:

• Serial Number
• Income Type
• Conditions for Exemption

In the old Income Tax Act, 1961, this was covered by Section 10 — a massive section with 140+ clauses, provisos, and explanations scattered throughout.

Key Point: The 2025 Act moves most exemptions from the complicated Section 10 into clear schedules. Schedule II covers general exempt incomes like agricultural income and life insurance proceeds.

No major policy changes — just better organization, simpler language, and removal of obsolete provisions.

Schedule 2 Under Income Tax Act 2025 (New Structure)

Title: Income Not To Be Included In Total Income

Linked Sections: Mainly Section 11 (general provision for incomes not part of total income)

Format: Simple table with Serial Number, Income Type, and Conditions

Key Exempt Incomes in Schedule 2

Life Insurance Exemption Rules (Detailed)

The conditions vary based on when the policy was issued:

Style: Short, tabular, easy to read — no nested provisos or explanations clutter.

Section 10 Under Income Tax Act 1961 (Old Structure)

Title: Incomes Not Included in Total Income

Location: Section 10 itself (no separate schedule)

Format: Long list of clauses and sub-clauses within one massive section

Key Matching Provisions

Style: Very detailed but messy — many clauses, sub-clauses, provisos (hundreds), explanations, and cross-references. Hard to navigate without experience.

Side-by-Side Comparison: Schedule 2 vs Section 10

Real-World Examples: How Exemptions Work

Example 1: Agricultural Income

Scenario: You own farmland in Karnataka and earn ₹5 lakh from selling crops.

Under Both Acts:

• Agricultural income is 100% exempt
• No tax liability
• No need to include in total income

Difference: In 2025 Act, you find this in Schedule 2, Row 1. In 1961 Act, you search through Section 10(1).

Example 2: Life Insurance Policy (Issued in 2015)

Scenario: You have a life insurance policy with:

• Sum Assured: ₹10 lakh
• Annual Premium: ₹80,000
• Maturity Amount: ₹15 lakh

Check Premium Ratio:

• Premium: ₹80,000
• 10% of Sum Assured: ₹1,00,000
• ✓ Premium is within limit (₹80,000 < ₹1,00,000)

Result Under Both Acts:

• Maturity amount of ₹15 lakh is fully exempt
• No tax on the proceeds

Difference: In 2025 Act, check Schedule 2 table for 2013-2021 period. In 1961 Act, read through Section 10(10D) with multiple provisos.

Example 3: ULIP Policy (Issued in 2022)

Scenario: You invested in ULIP with:

• Annual Premium: ₹3 lakh
• Sum Assured: ₹30 lakh
• Maturity proceeds: ₹8 lakh

Check Conditions:

• Premium ratio: ₹3 lakh / ₹30 lakh = 10% ✓
• Aggregate premium cap: ₹2.5 lakh
• Your premium: ₹3 lakh ✗ (exceeds cap)

Result Under Both Acts:

• Maturity proceeds are TAXABLE (exceeds ₹2.5 lakh cap)
• Must include in total income

Difference: In 2025 Act, clear table shows ₹2.5 lakh cap for 2021-2023 period. In 1961 Act, buried in provisos of Section 10(10D).

Example 4: Death Benefit from Life Insurance

Scenario: Your spouse receives ₹50 lakh death benefit from your life insurance policy.

Under Both Acts:

• Death benefits are fully exempt
• No premium ratio check needed
• No aggregate cap applies

Difference: In 2025 Act, Schedule 2 clearly states "Death Benefit — Fully Exempt". In 1961 Act, exception mentioned in Section 10(10D) provisos.

Key Exempt Incomes Covered in Schedule 2

1. Agricultural Income

What Qualifies:

• Income from cultivation of land
• Rent from agricultural land
• Income from farm buildings
• Sale of agricultural produce

Conditions: None — fully exempt

Common in: Karnataka (coffee, silk), Punjab (wheat, rice), Maharashtra (sugarcane)

2. Life Insurance Maturity Proceeds

What Qualifies:

• Maturity amount from life insurance policies
• Bonus additions
• Sum assured payouts

Conditions:

• Premium must not exceed specified % of sum assured
• Aggregate premium caps apply for recent policies
• Keyman insurance excluded

3. Death Benefits

What Qualifies:

• Amount received by nominee on death of insured
• Accidental death benefits
• Term insurance payouts

Conditions: None — fully exempt regardless of premium

4. Other Exempt Incomes (Brief Mention)

While Schedule 2 focuses on agricultural and insurance income, other schedules cover:

• HRA (House Rent Allowance)
• Leave Travel Allowance
• Gratuity
• Provident Fund withdrawals
• Scholarships

Detailed Life Insurance Exemption Rules

Understanding Premium-to-Sum-Assured Ratio

Formula: (Annual Premium / Sum Assured) × 100

Example:

• Sum Assured: ₹20 lakh
• Annual Premium: ₹1.5 lakh
• Ratio: (1.5 / 20) × 100 = 7.5%

For policies issued after 2012: 7.5% < 10% ✓ Exempt

Aggregate Premium Caps (Post-2021 Policies)

Regular Policies: ₹2.5 lakh aggregate annual premium cap

Special Cases: ₹5 lakh cap for:

• Policies for disabled or critical illness
• IFSC policies (post-April 2025)

How to Calculate:

• Add all premiums paid in a financial year
• Across all life insurance policies
• If total exceeds cap, maturity becomes taxable

Keyman Insurance Exception

What is Keyman Insurance: Policy taken by employer on employee's life

Tax Treatment:

• Premium: Deductible as business expense
• Maturity/Death Benefit: Taxable as business income
• NOT covered under Schedule 2 exemption

Simple Analysis: What Does This Mean for You?

If You're Checking Exemptions

Question: "Is my life insurance payout tax-free?" or "Is agricultural income taxed?"

2025 Act (Schedule 2): Way easier — just look at the table and conditions column. No digging through clauses and provisos.

1961 Act (Section 10): Overwhelming — hundreds of lines, nested provisos, cross-references.

Content is the Same

• Agricultural income remains fully exempt
• Life insurance rules (premium ratios, caps) are carried over without change
• No new taxes or exemptions removed

Big Win for Beginners

Old Section 10: Overwhelming (hundreds of lines), required CA expertise

New Schedule 2: Short, table-based — perfect for salaried folks or small taxpayers in Bengaluru wondering about insurance or farm income

No Extra Burden

Just better presentation. If your income fits the conditions, it's exempt in both acts.

Frequently Asked Questions

Is agricultural income still 100% tax-free in 2026?

Yes! Agricultural income remains fully exempt under Schedule 2 of the 2025 Act, just as it was under Section 10(1) of the 1961 Act.

What happens if my life insurance premium exceeds the limit?

The entire maturity proceeds become taxable and must be included in your total income. Only the premium paid is not deductible.

Do I need to report exempt income in my ITR?

Yes, you should report exempt income in the appropriate schedule of your ITR, even though it's not taxed. This helps maintain transparency.

Are death benefits from term insurance tax-free?

Yes, death benefits are fully exempt regardless of premium amount or policy type. This applies to both term and traditional life insurance.

What if I have multiple life insurance policies?

For policies issued after April 1, 2021, the aggregate premium cap (₹2.5 lakh or ₹5 lakh) applies across ALL policies combined.

Is the exemption automatic or do I need to claim it?

The exemption is automatic. You simply don't include the exempt income in your total income when calculating tax.

Can I claim deduction for life insurance premium under 80C?

Yes, under the old regime. Premium paid (up to ₹1.5 lakh under 80C) is deductible, AND maturity proceeds are exempt (if conditions met). Double benefit!

What about ULIPs bought before 2021?

ULIPs bought before April 1, 2021, don't have the ₹2.5 lakh aggregate cap. Only the premium-to-sum-assured ratio applies.

How to Verify Your Exemption Eligibility

Step 1: Identify Income Type

• Agricultural income?
• Life insurance maturity?
• Death benefit?

Step 2: Check Policy Details (For Insurance)

• Policy issue date
• Sum assured amount
• Annual premium paid
• Total premiums across all policies

Step 3: Apply Relevant Rules

• Find your policy period in Schedule 2 table
• Check premium ratio: (Premium / Sum Assured) × 100
• Verify aggregate cap if applicable

Step 4: Document Everything

• Keep policy documents
• Premium payment receipts
• Maturity/claim settlement letters
• Agricultural income records

Common Mistakes to Avoid

Mistake 1: Not Checking Aggregate Cap

Many people check individual policy premium ratios but forget the ₹2.5 lakh aggregate cap across all policies.

Mistake 2: Assuming All Insurance is Exempt

Keyman insurance, endowment plans with high premiums, and certain investment-linked policies may be taxable.

Mistake 3: Not Reporting Exempt Income

Even though exempt, you should report it in your ITR for transparency and to avoid notices.

Mistake 4: Confusing Premium Deduction with Maturity Exemption

Premium deduction (80C) and maturity exemption are separate. Both have different conditions.

Bottom Line: Schedule 2 Simplified

Schedule 2 (2025 Act) = Modern, table version of old Section 10's key exemptions (agricultural + insurance)

Benefits:

• Simpler language
• Less clutter
• Same rules
• Easier navigation
• Beginner-friendly

For 95% of taxpayers, Schedule 2 provides all the information needed about exempt incomes without consulting a CA.

How Namratha & Co. Can Help

Our exemption planning services include:

• Exemption Eligibility Check: Verify if your income qualifies for exemption
• Life Insurance Policy Review: Analyze premium ratios and aggregate caps
• Agricultural Income Documentation: Proper record-keeping for farm income
• ITR Filing with Exemptions: Accurate reporting of exempt incomes
• Tax Planning: Structure investments to maximize exemptions
• Notice Handling: Respond to queries about exempt income claims

Quick Reference Checklist

For Agricultural Income:

• ✓ Maintain land ownership documents
• ✓ Keep records of agricultural activities
• ✓ Document sale of produce
• ✓ Report in ITR even though exempt

For Life Insurance:

• ✓ Check policy issue date
• ✓ Calculate premium-to-sum-assured ratio
• ✓ Verify aggregate premium across all policies
• ✓ Keep all policy documents
• ✓ Obtain maturity/claim settlement letter
• ✓ Report in ITR if exempt

For Death Benefits:

• ✓ Obtain death certificate
• ✓ Get claim settlement letter
• ✓ Keep policy documents
• ✓ Report in nominee's ITR

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About the Author: CA Namratha is a practicing Chartered Accountant based in Bengaluru, Karnataka, with expertise in tax exemptions and compliance. She helps individuals and businesses understand and claim legitimate tax exemptions while maintaining proper documentation.

Last Updated: February 20, 2026 | Reading Time: 12 minutes | Expertise Level: Beginner to Intermediate

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Unsure if your income qualifies for exemption? Contact Namratha & Co. for expert analysis of your agricultural income, life insurance policies, and other exempt income sources.