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What Is Section 123?
Section 123 of the Income Tax Act, 2025, is the updated version of the old Section 80C. It allows individual taxpayers and Hindu Undivided Families (HUFs) to claim deductions of up to ₹1,50,000 from their gross total income in a financial year. This deduction is available only if you opt for the old tax regime. If you have chosen the new tax regime, you will not be able to claim this deduction.
The section covers a wide range of investments and expenses, from life insurance premiums and provident fund contributions to tuition fees and home loan principal repayments. Essentially, if you are spending money on certain government-approved financial instruments or expenses, you can reduce your taxable income by up to ₹1,50,000 per year.
How Section 123 Replaces Section 80C? (Old vs New Act)
With the introduction of the Income Tax Act, 2025, several well-known deduction provisions have been renumbered, although their core purpose remains largely unchanged. Section 80C and related provisions under the old Act now appear under Sections 123 and 124 of the new Act. The table below shows how these sections correspond to each other and the deductions they continue to provide.
| Old Section |
New Section |
What It Covers |
|---|
| 80C |
123 read with Schedule XV |
Life insurance premiums, PPF, ELSS, tuition fees, home loan principal, NSC, and more |
| 80CCC |
123 read with Schedule XV |
Contributions to pension funds offered by insurance companies |
| 80CCD(1) |
124 |
Employee contributions to the National Pension System (NPS) |
| 80CCD(1B) |
124(3) |
Additional NPS contributions up to ₹50,000 (over and above the ₹1,50,000 limit) |
| 80CCD(2) |
124 |
Employer contributions to NPS (not subject to the ₹1,50,000 cap) |
The point that needs to be remembered is that the total deduction in respect of Section 123 (read with Schedule XV) cannot go beyond ₹1,50,000. However, Section 124, which relates to additional NPS contributions, allows an extra deduction of up to ₹50,000 over and above this limit. NPS, therefore, becomes very appealing from both the tax and savings points of view.
What Does Schedule XV Include? Eligible Investments Under Section 123
Schedule XV under the Income Tax Act, 2025 specifies the investments, savings instruments, and eligible expenses that qualify for deduction under Section 123. These options help taxpayers reduce their taxable income while encouraging long-term savings and financial security. Some of the key eligible investments and payments are listed below:
- Public Provident Fund (PPF): PPF is one of the most popular long-term savings instruments in India. It comes with a 15-year lock-in period and offers tax exemption on interest. Contributions of up to ₹1,50,000 per year are eligible for deduction.
- Employee Provident Fund (EPF): If you are a salaried employee, your contribution to EPF is automatically eligible for deduction under Section 123. The employer’s contribution is not counted towards your ₹1,50,000 limit.
- Equity Linked Savings Scheme (ELSS): ELSS mutual funds have a lock-in period of just three years, which makes them the shortest lock-in among all Section 123 instruments. They also offer the potential for higher returns as they invest in equities.
- National Savings Certificate (NSC): NSC is a fixed-income investment backed by the government. The interest earned on NSC is also eligible for deduction each year, as it is deemed to be reinvested.
- Life Insurance Premium: Premiums paid for life insurance policies for yourself, your spouse, or your children are eligible for deduction. The premium should not exceed 10% of the sum assured for policies issued after April 2012.
- Tuition Fees: Fees paid for the full-time education of up to two children in any school, college, or university in India qualify for deduction.
- Home Loan Principal Repayment: The principal component of your home loan EMI qualifies for deduction under Section 123. This is subject to the overall ₹1,50,000 limit.
- National Pension System (NPS): Contributions to NPS qualify both under Section 123(3) within the ₹1,50,000 limit and under Section 124 for an additional ₹50,000 deduction.
- Sukanya Samriddhi Yojana (SSY): This scheme is meant for the girl child and offers attractive returns along with tax exemption on interest. Contributions qualify for a deduction under Section 123.
- Senior Citizens Savings Scheme (SCSS): Senior citizens can invest in this scheme and claim deductions on their contributions under Section 123.
How to Claim a Deduction Under Section 123?
As we discussed earlier, Section 123 allows individuals and Hindu Undivided Families (HUFs) to claim deductions up to ₹1,50,000 (₹1.5 Lakh) per financial year on eligible investments and savings schemes. But remember, Section 123 deductions are only available if you choose to file your returns under the old tax regime. Here is a step-by-step guide to claim a deduction under Section 123:
Step 1: Choose and invest in eligible savings instruments
Review the list of approved instruments under Schedule XV that align with your financial goals and complete your investments before March 31 of the financial year.
Step 2: Track and calculate your total contributions
Add up all the qualifying amounts you spent or invested across the various instruments listed above. Keep in mind that even if your total investments exceed ₹1.5 Lakh, your maximum legal deduction under Section 123 will strictly be capped at ₹1,50,000.
Step 3: Collect and preserve your investment proofs
Gather proper documentation for every single expense or investment you plan to claim. Depending on what you chose, ensure you have your premium receipts, fund statements, deposit certificates, home loan repayment certificates, or school fee receipts safely saved.
Step 4: Declare your investments to your employer (For Salaried Individuals)
If you are salaried, submit your investment declarations and the collected proofs to your HR/Finance department during the year (usually via Form 12BB or your company portal). This ensures your employer calculates your Tax Deducted at Source (TDS) correctly so that extra tax isn’t charged from your monthly salary.
Step 5: Fill out and file your Income Tax Return (ITR)
When filing your annual tax return (such as ITR-1), input the total eligible investment amount under the Section 123 deduction field. Ensure that the figures you enter accurately mirror your collected investment proofs.
Step 6: e-Verify your tax return
After submitting your ITR, complete the e-verification process within the permitted timeline. Your return will not be fully processed, and any tax refunds resulting from your Section 123 savings will not be released until they are successfully verified.
The other area that most taxpayers tend to overlook is the deadline for making investments to claim Section 123 deductions. These investments should be made during the financial year (from 1st April to 31st March). Last-minute investments are common, but the best approach is to be prepared in advance.
What Is the Insurance Premium Limit Under Section 123?
Life insurance is one of the most common instruments used to claim deductions under Section 123. However, there are specific conditions that must be met for the premium to qualify:
- For policies issued on or after 1st April 2012, the annual premium must not exceed 10% of the sum assured.
- For policies issued before 1st April 2012, the premium should not exceed 20% of the sum assured.
If the premium paid in any year exceeds the applicable limit, only the portion that falls within the limit will be eligible for deduction. For instance, if the sum assured is ₹5,00,000 and the annual premium is ₹60,000 (which is 12% of the sum assured), only ₹50,000 (which is 10% of ₹5,00,000) will qualify for the deduction. The remaining ₹10,000 will not be deductible.
It is also important to remember that the deduction is available only for premiums paid towards life insurance policies, not health insurance. Health insurance premiums are covered under a different section of the Act.
Common Mistakes Under Section 123
Here are a few common mistakes people make regarding Section 123 deductions that you should avoid.
- Using the New Tax Regime: Section 123 deductions are strictly restricted to the old tax regime. If you switch to the default new regime, these tax-saving investments cannot be claimed.
- Misinterpreting the ₹1.5 Lakh Limit: The cap is an aggregate total across all investments, not a per-instrument limit. Any amount invested beyond ₹1,50,000 provides no extra tax relief.
- Breaking Lock-in Periods: Cutting your investments early triggers tax reversals. If you exit ELSS under 3 years or let traditional life insurance lapse under 2 years, past deductions become taxable income.
- Including the Employer’s EPF Share: Only your own employee contribution to the EPF counts toward your Section 123 total. Your employer’s matching contribution is separate.
- Ignoring the 10% Insurance Rule: For policies issued after 2012, your annual premium cannot exceed 10% of the total sum assured. Any premium paid above this cap is disqualified from the deduction.
- Filing Without Actual Proofs: Entering investment numbers on your ITR without matching receipts or certificates will trigger a tax notice if your return is flagged for verification.
Conclusion
Section 123 of the Income Tax Act, 2025 carries forward the intent and framework of the old Section 80C, giving taxpayers a meaningful way to reduce their tax liability while encouraging savings and investment. With a deduction limit of ₹1,50,000 and a wide variety of eligible instruments, it remains one of the most relevant provisions for individual taxpayers in India. Whether you are investing in PPF, contributing to EPF, paying a life insurance premium, or repaying a home loan, each rupee counts towards your overall deduction.
If you are also contributing to NPS, do not forget the additional ₹50,000 benefit under Section 124. Planning your investments early in the financial year always leads to better financial outcomes. If you are unsure about which instruments suit your situation best, it is worth consulting a qualified tax professional who can help you make the most of what Section 123 has to offer.
FAQs
1
Is Section 123 of the Income Tax Act, 2025, the same as Section 80C?
Essentially, yes. It acts as the direct replacement for the old Section 80C framework. The modern law moves the specific investment rules into Schedule XV, but the baseline tax-saving benefits carry forward.
2
Can I claim Section 123 deductions under the new tax regime?
No, you can’t. The new tax regime functions on lower tax slabs while ignoring standard deductions. Section 123 only provides relief if you opt out of the default system and file under the old tax regime.
3
What is the maximum deduction allowed under Section 123?
The Maximum cap is set at ₹1,50,000 for each fiscal year. Despite the total amount you invest through PPF, ELSS, and tuition fees being ₹2,00,000, the total tax benefit will be capped at the ₹1.5 lakh mark only.
4
Can an HUF claim deductions under Section 123?
Yes. The law explicitly states that both individual taxpayers and Hindu Undivided Families (HUFs) can use Section 123 to lower their taxable liability.
5
Is the employer’s NPS contribution counted in the ₹1,50,000 limit?
No, it isn’t. Only your own employee contributions to the NPS fall under this specific limit. Employer contributions get handled separately under different sections, such as 124 and 129.
6
Can I claim a deduction for my spouse’s life insurance premium?
Yes, you’re covered. You can claim deductions for premiums paid on policies covering yourself, your spouse, and your children.
7
What happens if I surrender my life insurance policy early?
If you exit a regular life insurance policy before holding it for a minimum of two years, the tax department reverses your previous benefits. The deductions you claimed in prior years get added back into your income as taxable income for the current year.
8
Are ELSS mutual funds a good option under Section 123?
They remain highly popular because they offer the shortest lock-in period (just 3 years) among all tax-saving options, alongside potential equity returns. Just keep in mind that they carry market risks that fixed-income choices like PPF don’t.
9
Do I need to submit proof of Section 123 investments to the tax department?
You don’t need to upload receipts when physically filing your ITR. However, keep your investment proofs (receipts, statements, certificates) securely preserved for at least six years, as the Income Tax Department may ask for them later in the event of a scrutiny or audit.
10
Can tuition fees for online courses be claimed under Section 123?
Not necessarily. The rules state that the educational fee must be paid for the full-time education of not more than two children in registered institutions in India. Casual online certifications or part-time adult education programs usually don’t qualify.
