Section 123 of Income Tax Act 2025 – Deductions, Eligibility & Schedule XV Guide

Section 123 of the Income Tax Act, 2025 provides a deduction for specified investments and expenditures, such as tuition fees, home loan principal payments, investments in ELSS, PPF, and life insurance, etc, for up to Rs. 1.5 lakh per financial year.

Section 123 replaces the popular section 80C of the Income Tax Act, 1961. The new provision is applicable from the financial year 2026-27.

What is Section 123 of the Income Tax Act, 2025?

Section 123 is a deduction provision under Chapter VIII of the Income Tax Act, 2025. It allows individual taxpayers and Hindu Undivided Families (HUFs) to claim a deduction of up to ₹1,50,000 per tax year on investments and payments made towards specified financial instruments listed under Schedule XV of the Act.

Section 123 is effective from 1st April, 2026 (i.e., from Tax Year 2026-27)

How Section 123 Replaces Section 80C? (Old vs New Act) 

The substance of the deduction remains the same. The section has been renumbered and referenced in the schedule for easier reference and navigation.

Who can claim the deduction under Section 123?

Section 123 is available to:

• Individuals (salaried employees, self-employed professionals, freelancers, business owners)
• Hindu Undivided Families (HUFs)

It is NOT available to:

• Companies
• Partnership firms
• LLPs (Limited Liability Partnerships)
• Associations of persons (AOP) or body of individuals (BOI)

Note: Section 123 deductions are generally available only under the old tax regime. If you have opted for the new tax regime (Section 202 of the Income Tax Act, 2025), you will not be able to claim this deduction. We explain this in more detail in a section below.

What is Schedule XV? Full list of Eligible Investments under Section 123

Schedule XV is a detailed schedule attached to the Income Tax Act, 2025, that lists all investments or payments eligible for deduction under Section 123. Think of it as the official menu of tax-saving options.

Here is the complete list of eligible investments and payments under Schedule XV:

• Life Insurance Premiums: Insurance premium paid for the self, spouse and children are eligible for section 123 deduction. The premium should not exceed 10% of the sum assured if the policy is issued after 1st April 2012.
• Employee Provident Fund (EPF): Your own contribution to EPF through your employer-managed fund.
• Public Provident Fund (PPF): Contributions to PPF accounts held in your own name, spouse's name, or children's name.
• National Savings Certificate (NSC): Amount invested in NSC VIII issued from post offices.
• Equity Linked Savings Scheme (ELSS): Investments in notified ELSS mutual funds - these come with a 3-year lock-in period and are popular for their dual benefit of returns and tax savings.
• Unit Linked Insurance Plans (ULIPs): Premiums paid for ULIPs - subject to conditions similar to regular life insurance policies.
• Tax-Saver Fixed Deposits (FDs): 5-year term deposits with scheduled banks - note that interest earned is still taxable.
• National Pension System (NPS) – Tier I: Employee's own contribution to NPS Tier I accounts.
• Senior Citizens Savings Scheme (SCSS): Deposits made under the Senior Citizens Savings Scheme.
• Sukanya Samriddhi Yojana (SSY): Contributions to SSY accounts opened in the name of a girl child under 10 years.
• Repayment of Home Loan Principal: Repayment of principal of housing loan taken for the purchase/construction of residential property.
• Stamp Duty and Registration Charges: Paid during of purchase of residential property - eligible in the year of payment.
• Tuition Fees: Full-time education fees paid to schools, colleges, and universities in India for up to two children.
• Deferred Annuity Plans: Amounts paid towards deferred annuity contracts. Annuity contracts are financial arrangements under which premiums are paid for a specified period, after which the policyholder receives a fixed periodic payment, typically monthly. Such contracts are generally designed to provide a steady source of income during retirement.
• Contribution to Notified Pension Funds: Contributions to pension funds notified by the Central Government.

Important: The combined total of all these investments in a single tax year cannot exceed ₹1,50,000 for the Section 123 deduction.

Maximum Deduction Limit Under Section 123

The maximum deduction availabe under Section 123 is ₹1,50,000 (₹1.5 lakh) per tax year. This is an aggregate limit - meaning it covers the total of all eligible investments combined, not each investment separately.

Here's how it works with an example:

• You invest ₹50,000 in PPF
• You pay ₹30,000 as life insurance premium
• Your EPF contribution is ₹80,000
• Total: ₹1,60,000

Even though your total investment is ₹1,60,000, your deduction under Section 123 is capped at ₹1,50,000. The remaining ₹10,000 does not give you additional tax relief under this section.

Tip: If you want to save more tax beyond ₹1.5 lakh, look at Section 125 (NPS – Tier I, additional ₹50,000) and Section 80D equivalent under the new Act for health insurance premiums.

Section 123 and the New Tax Regime – Key Difference

Section 123 deductions are only available if you opt for the old tax regime. You can choose the most beneficial regime for you by analysing the eligible deductions and tax outflow under both the old and new regimes.

How to claim Section 123 Deduction while filing ITR?

For the current tax season, Section 80C is still applicable. The following procedures can be observed for claiming section 123 deductions for the tax year  2026-27.

1. Choose the Old Tax Regime:  Since Section 123 deductions are not available under the new regime, you need to opt for the old tax regime at the time of filing your ITR.
2. Gather Investment Proofs:  Collect proof of all eligible investments: premium receipts, PPF passbook, ELSS account statement, EPF passbook, home loan principal certificate, etc. If you have your Form 16, which includes all deduction details, you do not need the other documents when filing your ITR.
3. Calculate Total Eligible Investments:  Add up all eligible investments and cap the total at ₹1,50,000.
4. Enter in ITR Form:  Under Schedule VIII (Deductions) in your ITR form, enter the Section 123 deduction amount. 
5. Submit and Verify:  File your ITR before 31st July of the next tax year (for non-audit cases). Verify using Aadhaar OTP, net banking, or EVC.

Common Mistakes under Section 123

• Investing more than ₹1.5 lakh expecting higher deduction:  The limit is fixed. Investing ₹2 lakh doesn't give you an additional deduction; it is still capped at ₹1.5 lakh.
• Choosing a new regime but still trying to claim Section 123:  Not allowed. Section 123 only works under the old regime.
• Forgetting employer's EPF contribution counts separately:  Only your own (employee) contribution to EPF qualifies. The employer's contribution does not count toward the ₹1.5 lakh limit.
• Premiums exceeding 10% of sum assured:  If the premium exceeds 10% of the sum assured for policies issued after 1 April 2012, the excess amount is not eligible.
• Claiming ELSS in the wrong year:  You can only claim ELSS deduction in the year the investment is made, not when you redeem.
• Not keeping investment proofs:  Always save receipts, account statements, and certificates - your employer or the IT department may ask for proof.