Section 123 Tax-Saving Deductions: What Replaces Section 80C?

Saving and investing are important parts of financial planning. Income-tax law also recognises certain specified investments, deposits and payments by allowing eligible taxpayers to deduct them while computing taxable income.

With the Income-tax Act, 2025 coming into force from 1 April 2026, the familiar deduction earlier claimed under Section 80C of the Income-tax Act, 1961 has been reorganised. For Tax Year 2026-27 onwards, the corresponding deduction is provided under Section 123 read with Schedule XV of the Income-tax Act, 2025.

Section 123 allows an individual or Hindu Undivided Family (HUF) a deduction for qualifying payments and investments specified in Schedule XV, subject to an overall ceiling of ₹1,50,000 for a tax year.

Section 80C vs Section 123: What Has Changed?

Can Section 123 Deduction Be Claimed Under the New Tax Regime?

No. The new tax regime under Section 202 of the Income-tax Act, 2025 is the default regime, and the deduction under Section 123 is not available while computing income under that regime.

A taxpayer who is eligible and opts for the alternative regime under which such deductions are permitted may claim qualifying amounts, subject to the prescribed conditions.

Therefore, simply making a tax-saving investment does not automatically reduce tax. The taxpayer's applicable tax regime must also permit the deduction.

Tax-Saving Investments and Payments Covered Under Section 123

1. Sukanya Samriddhi Account

Payments into an eligible Government-notified deposit scheme for a girl child can qualify under Schedule XV. This includes schemes such as the Sukanya Samriddhi Account, subject to the applicable scheme conditions.

Interest rates on small-savings schemes may be revised periodically by the Government. Therefore, taxpayers should check the prevailing rate before investing.

Even where the amount deposited exceeds ₹1,50,000, the overall deduction available under Section 123 remains restricted to the prescribed limit.

2. Equity Linked Savings Scheme (ELSS)

Investment in qualifying Equity Linked Savings Schemes (ELSS) or other notified mutual-fund schemes can qualify for deduction.

ELSS is an equity-oriented mutual fund product and carries investment risk. It generally has a three-year lock-in period from the date of allotment of units.

The deduction available on making an ELSS investment should not be confused with the taxation of returns from the investment. Capital gains, dividends and redemption proceeds are governed separately by the applicable tax provisions.

3. National Savings Certificate

Subscription to eligible Government-notified savings certificates continues to be covered under Schedule XV. National Savings Certificate (NSC) is one of the commonly used qualifying investments.

Taxpayers should not assume that every Post Office savings product automatically qualifies for deduction.

4. Five-Year Tax-Saving Fixed Deposits

A term deposit for a period of not less than five years with a scheduled bank, under an eligible notified scheme, can qualify for deduction.

Qualifying five-year Post Office Time Deposits may also be covered.

The deduction relates to the qualifying amount invested. The interest earned on such deposits is subject to separate tax treatment.

5. Provident Fund Contributions

Eligible contributions to provident funds continue to form an important part of the tax-saving framework.

Schedule XV includes contributions to specified provident funds and contributions made by an employee to a recognised provident fund, subject to the applicable conditions.

Accordingly, qualifying employee PF contributions and eligible provident fund investments can form part of the overall ₹1,50,000 deduction.

6. Life Insurance Premiums and Eligible Insurance Plans

Premium paid for a qualifying life insurance policy may be included in the deduction where the policy covers the taxpayer, spouse or child. In the case of an HUF, an eligible policy may cover a member of the HUF.

The amount eligible for deduction is subject to statutory conditions, including conditions relating to the premium as a percentage of the actual capital sum assured.

Certain eligible Unit Linked Insurance Plans (ULIPs) may also fall within the prescribed framework. However, taxpayers should not assume that every ULIP premium or every maturity amount receives identical tax treatment.

7. Tuition Fees for Children

Tuition fees paid by an individual to a university, college, school or other educational institution situated in India for the full-time education of up to two children can qualify, subject to the applicable conditions.

The deduction is specifically intended for qualifying tuition fees. Amounts such as development fees, donations or similar charges are generally not included.

Therefore, the entire amount appearing on a school or college fee receipt should not automatically be claimed as a deduction.

8. Housing Loan Principal Repayment

A home-loan EMI generally consists of two parts: principal and interest.

Eligible repayment of the principal amount borrowed for the purchase or construction of a residential house can qualify under Section 123 read with Schedule XV, subject to the specified conditions and eligible lenders.

The tax treatment of housing-loan interest is separate and should not be confused with the deduction available for principal repayment.

Taxpayers should also be aware of the prescribed holding-period conditions. A premature transfer of the house can affect deductions claimed earlier.

9. Stamp Duty and Registration Charges on a House

Eligible stamp duty, registration fees and certain other expenses incurred for acquiring a residential house property may also form part of the qualifying deduction under Schedule XV.

These payments are subject to the overall ₹1,50,000 limit together with the taxpayer's other qualifying investments and payments.

10. Senior Citizen Savings Scheme and Post Office Deposits

Schedule XV also covers deposits under eligible schemes such as the Senior Citizen Savings Scheme and qualifying five-year Post Office Time Deposits.

Specific withdrawal and lock-in conditions may apply. In certain circumstances, premature withdrawal may affect the tax treatment or earlier deduction.

11. Deferred Annuity and Pension-Related Investments

Certain payments towards eligible deferred annuity contracts and notified pension or annuity plans may also qualify under Schedule XV.

A deduction available at the contribution stage should not be confused with the taxability of pension, surrender proceeds, withdrawals or other amounts subsequently received.

Example: How the ₹1.5 Lakh Limit Works

Suppose an individual eligible to claim the Section 123 deduction during Tax Year 2026-27 makes the following qualifying payments:

Although the taxpayer has made qualifying payments of ₹1,75,000, the maximum deduction available under Section 123 is restricted to ₹1,50,000.

Important Points to Remember

• Section 123 read with Schedule XV broadly corresponds to the earlier Section 80C framework.
• The overall deduction limit continues to be ₹1,50,000.
• The deduction is available to eligible individuals and HUFs.
• It is not available while computing income under the default new tax regime under Section 202.
• Not every Government-backed or marketed "tax-saving" investment automatically qualifies.
• Eligible tuition fees, housing-loan principal and certain stamp duty and registration charges can form part of the deduction.
• ELSS investments carry market risk and generally have a three-year lock-in.
• A deduction for an investment does not automatically make its interest, dividend, maturity proceeds or capital gains tax-free.
• Taxpayers should retain investment proofs, premium receipts, fee receipts, home-loan certificates and property-related payment documents.

Conclusion

The Income-tax Act, 2025 has changed the numbering and presentation of the familiar Section 80C deduction but has substantially continued the tax-saving framework.

For Tax Year 2026-27 onwards, taxpayers should refer to Section 123 read with Schedule XV instead of Section 80C. The overall deduction continues at ₹1,50,000, subject to eligibility, investment-specific conditions and the taxpayer being under a tax regime that permits the deduction.

Tax-saving should not be the only factor while choosing an investment. The investment should also be evaluated based on financial goals, risk, liquidity requirements, expected returns and investment horizon.

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