As per Census of India 2011, literacy rate denotes the percentage of population above:

7 years of age

The correct answer is Option (2) → 7 years of age

In India – literacy rate denotes the percentage of population above 7 years of age, who is able to read, write and have the ability to do arithmetic calculations with understanding.

Note: this question is from Pre rationalised NCERT textbook from Chapter: Population Composition.