Section 123 Deduction under the Income-tax Act, 2025

PPF, Life Insurance, Tuition Fees, Home Loan Principal and Other Eligible Investments

Tax-saving investments such as PPF, eligible life insurance premiums, certain provident-fund contributions, children's tuition fees and repayment of housing-loan principal continue to have a place under the Income-tax Act, 2025. However, the familiar section number has changed.

From Tax Year 2026-27, these specified investments and payments are primarily covered by Section 123 read with Schedule XV of the Income-tax Act, 2025.

Section 123 allows an eligible individual or Hindu undivided family (HUF) to reduce qualifying investments and payments from Gross Total Income, subject to an overall ceiling of ₹1,50,000 for a tax year.

Section 80C has become Section 123 under the new Act

Taxpayers are familiar with deductions such as PPF, life insurance premium and tuition fees as part of the Section 80C framework under the Income-tax Act, 1961.

With the Income-tax Act, 2025 becoming effective from 1 April 2026, the corresponding deduction framework has been reorganised. The eligible investments and payments are now listed in Schedule XV and allowed through Section 123.

Who can claim deduction under Section 123?

Section 123 is available to:

• an individual; or
• a Hindu undivided family (HUF).

The eligible amount must relate to an investment, contribution, subscription or payment specified in Schedule XV and must satisfy the conditions attached to that particular item.

Maximum deduction under Section 123

The combined deduction for all qualifying investments and payments covered by Section 123 cannot exceed ₹1,50,000 in one tax year.

The limit applies to the aggregate amount. It is not a separate ₹1,50,000 limit for PPF, another ₹1,50,000 for life insurance and another ₹1,50,000 for tuition fees.

Major investments and payments eligible under Section 123

Schedule XV contains a broad list of eligible payments. Some of the most relevant items for individual taxpayers are explained below.

1. Public Provident Fund (PPF)

Contributions to an eligible Public Provident Fund account can qualify for Section 123 deduction.

In the case of an individual, the contribution can be made to an eligible PPF account in the name of:

• the individual;
• the individual's spouse; or
• any child of the individual.

In the case of an HUF, an eligible contribution may be made in the name of a member of the HUF, subject to the applicable scheme and tax conditions.

The PPF scheme itself permits deposits subject to its prescribed annual limits. However, the deduction available under Section 123 forms part of the overall ₹1,50,000 Section 123 ceiling.

2. Life insurance premium

Premium paid for an eligible life insurance policy can qualify for deduction.

For an individual, the policy may cover:

• the individual
• the spouse
• any child, whether minor or major

For an HUF, the policy may be on the life of a member of the HUF.

However, paying a premium does not automatically mean that the entire premium is deductible. The allowable amount can depend on the date on which the policy was issued and its actual capital sum assured.

3. Employee contribution to recognised or statutory provident fund

Eligible employee contributions to a recognised provident fund or a provident fund covered by the applicable provident-fund law can form part of the Section 123 deduction.

This is particularly relevant to salaried employees whose provident-fund contribution is deducted from salary every month.

4. Sukanya Samriddhi Account

An eligible amount deposited in a Sukanya Samriddhi Account can qualify under Section 123 where the account is maintained for:

• a girl child of the individual; or
• a girl child for whom the individual is the legal guardian.

The deduction for the contribution remains subject to the overall Section 123 ceiling.

5. National Savings Certificate

Subscription to eligible National Savings Certificates specified under Schedule XV can be considered for deduction under Section 123.

The investment should satisfy the conditions applicable to the notified savings certificate.

6. Tax-saving mutual fund units such as eligible ELSS investments

Subscription to units of a notified mutual fund or other eligible scheme can qualify where the investment falls within the categories specified in Schedule XV.

The tax deduction should not be confused with the tax treatment of income or capital gains arising from the investment. Deduction at the investment stage and taxation when the investment is redeemed are separate issues.

7. Tuition fees for children

Tuition fees can form part of Section 123 deduction, but the benefit is narrower than many taxpayers assume.

An individual can claim eligible tuition fees paid for the full-time education of a maximum of two children.

The educational institution must be situated in India and may include an eligible:

• school
• college
• university
• other qualifying educational institution

Example

A parent pays ₹55,000 as tuition fees, ₹12,000 as development charges and ₹8,000 as an annual activity fee to a school in India.

Subject to the remaining conditions of Section 123, only the qualifying tuition-fee component of ₹55,000 should be considered for this deduction.

8. Home-loan principal repayment

Repayment of the principal component of an eligible housing loan taken for the purchase or construction of a residential house property can form part of Section 123.

Qualifying repayments may include amounts paid towards loans from specified institutions such as eligible banks, Government bodies, housing-finance institutions and certain other recognised lenders covered by Schedule XV.

Only the eligible principal repayment is considered under this part of Section 123. Housing-loan interest is governed separately under the provisions dealing with interest and house-property income.

Stamp duty and registration charges

Eligible stamp duty, registration charges and other qualifying expenses incurred for transferring the residential property to the taxpayer may also form part of the Section 123 deduction, subject to the conditions of Schedule XV and the overall ₹1,50,000 ceiling.

9. Five-year tax-saving bank deposit

An eligible fixed deposit with a scheduled bank for a period of at least five years under the prescribed tax-saving scheme can qualify for Section 123 deduction.

A normal short-term fixed deposit should not be treated as eligible merely because it is maintained with a bank.

10. Five-year Post Office Time Deposit

An eligible five-year Post Office Time Deposit specified under Schedule XV can also form part of Section 123 deduction.

11. Senior Citizens Savings Scheme

Deposits made under the eligible Senior Citizens Savings Scheme can qualify, subject to the conditions governing the scheme and Section 123.

12. Approved superannuation and pension arrangements

Schedule XV also covers specified contributions to approved superannuation funds, notified pension funds, eligible annuity arrangements and certain contributions to pension schemes.

Some NPS contributions can interact with the separate deduction available under Section 124. A taxpayer should ensure that the same contribution is not claimed twice under different provisions.

13. Certain NPS Tier II contributions by Central Government employees

Contribution to the specified additional NPS account may qualify under Section 123 for an eligible Central Government employee where the statutory scheme and minimum holding-period conditions are satisfied.

14. Other specified investments

Schedule XV also covers certain other notified or approved investments, including specified:

• annuity plans
• unit-linked insurance plans
• pension funds
• housing-related deposit schemes
• NABARD bonds
• eligible equity shares or debentures
• other notified securities or investment arrangements

Taxpayers should confirm that the particular product falls within Schedule XV rather than assuming that every investment carrying words such as "saving", "pension" or "tax saver" automatically qualifies.

One combined example

Assume Priya has opted out of the default tax regime for Tax Year 2026-27 and makes the following payments:

Although ₹2,15,000 satisfies the individual eligibility calculations, Section 123 restricts the final deduction to ₹1,50,000.

Be careful about minimum holding periods and early withdrawal

Some Section 123 benefits come with conditions that continue even after the deduction has been claimed. Breaking those conditions can result in an earlier deduction effectively being brought back into taxation.

Examples include:

• premature termination of certain life insurance policies
• early discontinuance of specified ULIPs
• sale of a residential property within the specified period after possession where housing-related deduction was claimed
• premature transfer of specified shares or debentures
• early withdrawal from certain prescribed deposit schemes

Does Section 123 apply under the default tax regime?

No. Section 123 is among the deductions that are generally unavailable when an individual or HUF computes tax under the default regime under Section 202.

Therefore, a taxpayer who remains in the default regime cannot claim PPF, eligible life insurance, tuition fees or housing-loan principal under Section 123 merely because the underlying payment otherwise satisfies Schedule XV.

Documents taxpayers should retain

Depending on the deduction claimed, taxpayers should retain appropriate supporting records such as:

• PPF contribution statement or passbook
• life insurance premium receipts and policy details
• provident-fund contribution records
• Sukanya Samriddhi contribution statement
• NSC or other eligible investment proof
• school or college tuition-fee receipts showing the tuition component separately
• housing-loan certificate showing principal repayment
• property purchase documents
• stamp-duty and registration receipts
• tax-saving fixed-deposit certificate
• statements or certificates for other notified investments

Common mistakes while claiming Section 123

• Claiming more than ₹1,50,000: All qualifying Section 123 items share the overall ceiling.
• Claiming Section 123 under the default regime: The deduction is generally unavailable under Section 202's default regime.
• Claiming the full life insurance premium without checking the sum assured: The deductible amount may be restricted.
• Claiming all school charges: Development fees, donations and similar charges do not become tuition fees.
• Claiming fees paid to a foreign educational institution: The tuition-fee benefit discussed here requires the qualifying educational institution to be situated in India.
• Claiming home-loan interest under Section 123: Section 123 primarily covers eligible principal repayment and specified transfer expenses; interest is dealt with separately.
• Claiming renovation expenditure as housing-loan principal: Repairs and renovations do not automatically qualify.
• Ignoring lock-in conditions: Premature termination, transfer or withdrawal can have tax consequences.
• Using the old section number for Tax Year 2026-27: For income from 1 April 2026 onwards, refer to Section 123 and Schedule XV rather than automatically referring to Section 80C.

Key takeaway

Section 123 is the principal specified-investment deduction provision under the Income-tax Act, 2025. It covers several familiar tax-saving payments, including PPF, eligible life insurance premiums, provident-fund contributions, tuition fees, home-loan principal and specified savings products.

The most important rules are straightforward: the taxpayer must be eligible to claim Section 123, the investment or payment must fall within Schedule XV, all product-specific conditions must be satisfied, and the combined deduction cannot exceed ₹1,50,000 per tax year.

Taxpayers should also check their tax regime before planning investments only for a deduction. A qualifying payment does not provide a Section 123 tax benefit if the taxpayer remains under the default regime where the deduction is unavailable.

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