Section 123 of the Income Tax Act, 2025

What Does Section 123 of the Income Tax Act, 2025 Cover

Section 123 is basically the new version of Section 80 of the Income Tax Act, 1961. It allows individuals and HUFs to claim a deduction of up to ₹1.5 lakh for eligible investments and payments such as life insurance premiums, EPF/Provident Fund contribution, PPF, ULIP premiums, etc.
These eligible investments and payments are now listed under Schedule XV of the Income Tax Act, 2025.

The 2025 Act also removes terms like “previous year” & “assessment year”. Section 123 was put into effect on 1 April 2026, meaning it applies to the 2026-27 tax year.

Important Note: This ₹1.5 lakh deduction is NOT available if you choose the new tax regime.

For example: If your taxable income is ₹8 lakhs and you make ₹1.5 lakhs of eligible investments/payments under Section 123, your taxable income will effectively be reduced to ₹6.5 lakhs, subject to applicable rules.

What Investments and Payments Qualify Under Section 123?

Who Can Claim Deductions Under Section 123 of the Income Tax Act, 2025

Eligible taxpayers:

• Resident and Non-Resident individuals, whether salaried or self-employed
• Individuals of any age, including senior and super senior citizens
• Hindu Undivided Families (HUF)

Non-eligible:

• Companies
• Partnership firms and LLPs
• Trusts, associations of persons and bodies of individuals

What Qualifies Under Schedule XV

• Life insurance premiums for self, spouse, children or members of an HUF
  Deferred annuity plan contributions
• Employees Provident Fund, Public Provident Fund and other recognised provident funds
  Employee contribution to National Pension System (NPS)
• Equity Linked Savings Schemes (ELSS)
• Unit Linked Insurance Plans (ULIPs)
• National Savings Certificates
• 5 Year Tax Saving FD
• Senior Citizen Savings Scheme
• Sukanya Samriddhi Yojana
• Tuition fees for full-time deduction of up to 2 children
• Home loan principal repayment, plus stamp duty and registration charges on a residential property

Section 123 Under the Old and New Tax Regimes

One of the most important points to understand is that Section 123 cannot be claimed under the new tax regime under Section 202.
Therefore, a taxpayer should consider the total tax liability under both regimes before deciding which regime is more beneficial.
For example: If an individual has eligible investments under Section 123, along with other deductions available under the applicable provisions, the tax impact of choosing the regime should be evaluated rather than just looking at the ₹1.5 lakh deduction.

Section 123 vs Section 80C

How to Claim the Deduction

• Invest in Schedule XV instruments during the tax year, keeping the ₹1.5 lakh ceiling in view.
• Retain proof like premium receipts, PPF or EPF passbook entries, bank FD certificates, mutual fund statements, tuition fee receipts and the lender's principal repayment certificate.
• Declare planned investments to your employer through Form 12BB early in the year so excess TDS is not deducted, then submit proofs when asked.
• Report the deduction accurately in your return and complete e-verification. An unverified return is treated as never filed.

What Happens If You Invest More Than ₹1.5 Lakh?

Investing more than ₹1.5 lakh in eligible investments does not increase the deduction under Section 123.
For instance: If an individual makes investments worth ₹2 lakh, the maximum deduction that can be claimed under STILL remains ₹1.5 lakh.
This is an important aspect when planning tax-saving investments. Taxpayers should not invest in an instrument solely because they expect an additional Section 123 deduction once the overall limit has been exhausted.

Conclusion

For most taxpayers, Section 123 changes very little in practice. The limit, the instruments and the conditions are what they were under Section 80C. What changes is where you look for the detail, and the fact that the deduction now sits firmly on the old regime side of the fence. Check your regime choice first, then your existing commitments, then invest.