Section 123 of the Income Tax Act 2025

Section 123 of the Income Tax Act, 2025 when read along with Schedule XV replaces the provisions of older Section 80C of the Income Tax Act, 1961. The newly introduced Section 123 of Income Tax, 2025 deals with the deductions in respect of tax-saving investments and payments specified in Schedule XV of the new act.

As per current provisions of Section 123, an individual or a Hindu Undivided Family (HUF) can claim a maximum deduction of ₹1.5 lakh in a tax year. The list of eligible investments as well as eligible conditions for the tax deduction allowed u/s 123 are mentioned in Schedule XV of the Income Tax Act, 2025.

Section 123 of the new Income Tax Act, 2025 specifies the taxpayer groups who can avail the tax deduction. As per current tax rules, eligible taxpayers who can get tax deduction benefit of up to ₹1.5 lakh in a tax year include:

• All Individual Taxpayers (Includes individuals aged below 60 years, Senior Citizens and Super Senior Citizen taxpayers)
• Hindu Undivided Families (HUFs)

So, many other categories of taxpayers are not allowed to claim deductions under Section 123. Such non-eligible tax payers include but are not limited to:

An individual can claim a maximum deduction of ₹1.5 lakh from the total income in a tax year as per provisions of Section 123. This ceiling applies to a combined total of all the eligible investments and expenses mentioned in Schedule XV of Income Tax Act, 2025. Thus, taxpayers should plan their investments accordingly to take advantage of the deduction limit.

Let’s understand how this tax deduction is calculated with an example. Pratibha makes the following eligible payments and deposits in a tax year:

• Life Insurance Premium= ₹40,000
• Public Provident Fund (PPF) Contribution= ₹60,000
• Equity Linked Savings Scheme (ELSS)= ₹50,000
• EPF Deduction = ₹48,000

So, the total amount of eligible payments and deposits made in a tax year is ₹1.98 lakh. However the maximum deduction that can be availed u/s 123 in a tax year is ₹1.5 lakh. So, the extra amount of ₹48,000 in Schedule XV compliant instruments will not provide Pratibha with any additional tax benefit.

Section 123 allows deductions on specific investments and expenses listed in Schedule XV, helping taxpayers reduce their taxable income. Below the list of eligible expenses and investments as mentioned in Schedule XV of the Income Tax Act, 2025:

• Life Insurance Premiums: Premiums paid for life insurance policies providing cover to you, your spouse, children, or members of a HUF are eligible for deductions, promoting financial protection to dependents while offering tax benefits.
• Deferred Annuity Plan: Premium payments or salary deductions for availing a deferred annuity plan are also eligible for tax deduction u/s 123 of Income Tax Act, 2025. Eligible plans can be purchased for self or family members such as spouse and dependent children.
• Provident Fund Contribution: Employees’ Provident Fund (EPF), Public Provident Fund (PPF), or any other recognised provident fund contributions are tax-deductible, encouraging disciplined retirement savings.
• Equity Linked Savings Scheme (ELSS): ELSS mutual fund contributions are eligible for deductions. These market-linked funds have a mandatory 3-year lock-in period and provide better returns with tax benefits.
• National Savings Certificate (NSC): NSCs are government-backed fixed-income investments that are covered under Section 3(k) of the Government Savings Banks Act, 1873. These also qualify for Section 123 tax deduction benefit as per current provisions of the Income Tax Act, 2025.
• Tax-Saving Fixed Deposits: Tax-saving fixed deposits with scheduled banks that carry a minimum 5-year lock-in period are eligible for deductions. Similarly, a 5 year term deposit from the Post Office is also eligible for this tax deduction benefit.
• Senior Citizen Savings Scheme (SCSS): SCSS is a government-backed retirement plan for senior citizens (60 years and above). Section 123 provides tax benefits for SCSS contributions, promoting long-term savings and regular income.
• Tuition Fees for Children: Tuition fees paid for full-time education for up to two children are eligible for deduction. This is designed to help families manage their children’s education costs while receiving some tax relief on this necessary expense.
• Home Loan Principal Repayment: Repayment of the principal portion of a housing loan qualifies for tax deductions. Stamp duty and registration charges for residential property are also eligible for this benefits under current provisions mentioned in Schedule XV of the Income Tax Act, 2025.

Note: The list of eligible expenses and investments as per Schedule XV mentioned above is illustrative, not exhaustive. Please check the detailed Income Tax Act, 2025 or seek the help of a tax expert for further details.

There are certain conditions that a taxpayer needs to fulfil in order to claim a tax deduction on life insurance premiums. The maximum eligible premium for deductions varies based on the policy issue date and the health status of the insured person. The excess premium, in addition to the maximum prescribed limit, does not qualify for deductions.

Here are the major conditions to claim deductions for life insurance policies including term plans under Section 123, as per current provisions mentioned in Schedule XV of Income Tax Act, 2025:

The actual capital sum assured of an insurance policy refers to the minimum sum assured under the policy, if the covered event occurs during the policy term. This amount does not include any portion of the premiums that is returns as per policy conditions as well as any accrued bonuses or other payouts made by the insurer over and above the sum assured of the plan.

If any policies breach the above limits of annual premium to sum assured, the payments will not be eligible for tax deduction benefit u/s 123 of Income Tax Act, 2025.

Section 123 allows deductions on eligible investments and expenses only if the taxpayers holds the eligible instrument for a specified minimum period, known as the lock-in period. Here are the lock-in period rules for different types of investments as per the current provisions mentioned in Schedule XV of the Income Tax Act, 2025:

If eligible investments are withdrawn or discontinued before the mandatory lock-in period is completed, the tax benefits may no longer be valid. In such cases, the deductions allowed in previous years can be reversed, and the amount is added to your taxable income leading to additional tax liability.

Section 123 of the Income Tax Act, 2025, replaces the earlier Section 80C of the Income Tax Act, 1961. The new section continues the same ₹1.5 lakh per tax year deduction limit. However, instead of listing eligible investments under the section itself, the new law moves these details to Schedule XV.

However, in order to ease this transition to the new Income Tax Act, 2025, the provisions have been kept unchanged. The restructuring of the provisions in the new Section 123 and concurrent Schedule XV is designed to simplify the earlier comprehensive Section 80C. This is because Section 80C of the Income Tax Act, 1961 had undergone numerous amendments over the years, which had increased the complexity of this important tax saving provision.

Planning your tax savings under Section 123 of the Income Tax Act 2025 requires following a few simple but important steps. Check them out below:

With smart tax planning, taxpayers can avail of the maximum benefits under Section 123 and the concurrent Schedule XV of the Income Tax Act 2025. Here are some tips that you can follow: