Explanation:

Flag Code of India

• The Flag Code of India, 2002 reads that the Flag shall not be used as a drapery in any form whatsoever except in State / Military / Central Paramilitary Forces funerals hereinafter provided.
• It also says that on the above occasions too, the flag shall be draped over the bier or coffin with the saffron towards the head of the bier or coffin.
• The Flag shall not be lowered into the grave or burnt in the pyre.
• The flag can only be used during a funeral if it is accorded the status of a state funeral.
• The state funerals are held when people below pass away,
• People from police and armed forces,
• People who are holding or have held office of President, Vice-President, Prime Minister, Cabinet Minister, Chief Minister.

The status of a state funeral can be accorded in case of death of people not belonging to the above-mentioned categories by state government.

• Section 2 of Prevention of Insults to National Honour Act says that whoever insults the National Flag or the Indian Constitution shall be punished with imprisonment for a term which may extend to three years, or with fine, or with both.

Hence option 1st is correct.