Interest income from agricultural land acquisition by government for national highway

Let me answer this in two parts:

Treatment of Interest:

Interest will be taxable as Income from Other Sources at the normal slab rates applicable.

Treatment of Funds received on compulsory acquisition of agricultural land:

You first need to determine whether your agricultural land falls within the definition of agricultural land as provided under Section 2(14)(iii) (a) or (b). After that you need to go through the conditions provided under Section 10(37) and only if you fulfill them, you will be able to claim the amount as exempt. Otherwise, you may have to go through the capital gain provisions and pay relevant taxes on the same.

Below is the extract of the said Section:

2. In this Act, unless the context otherwise requires,—

(14)  "capital asset" means—

(iii)  agricultural land in India, not being land situate—

(a)  in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand; or

(b)  in any area within the distance, measured aerially,—

 (I)  not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or

(II)  not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or

(III)  not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh.

Explanation.—For the purposes of this sub-clause, "population" means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year;

Only if the land you are referring to falls under the above definition, you can term it as an agricultural land eligible for exemption.