The Income Tax Act, 2025 has introduced a revised structure for various provisions under the Indian taxation system. One of the most important changes for individual taxpayers is the replacement of Section 80C of the Income Tax Act, 1961 with Section 123 under the new Act.
Section 123 continues to provide deductions for specified investments, savings schemes, insurance premiums, and certain expenses incurred by taxpayers. Although the numbering and drafting style have changed under the Income Tax Act, 2025, the fundamental objective of encouraging long-term savings and disciplined financial planning remains unchanged.
For salaried individuals and small taxpayers, Section 123 is expected to remain one of the most widely used deduction provisions under the Income Tax Act, 2025.
📌 What is Section 123 of the Income Tax Act, 2025?
Section 123 of the Income Tax Act, 2025 allows eligible taxpayers to claim deductions from their gross total income for investments and payments made in approved financial instruments and schemes.
This section is broadly equivalent to Section 80C of the Income Tax Act, 1961. The government has reorganised and renumbered the provisions while retaining most of the existing tax benefits.
🎯 The purpose of Section 123 is to:
• Promote long-term savings habits
• Encourage retirement planning
• Increase participation in government-backed savings schemes
• Support life insurance and pension coverage
• Encourage investment in tax-saving instruments
👥 Who Can Claim Deduction Under Section 123?
The deduction under Section 123 can be claimed by:
• Individuals
• Hindu Undivided Families (HUFs)
Partnership firms, LLPs, and companies are generally not eligible to claim deductions under this section.
The deduction can be claimed only if the investment or payment has been made during the relevant financial year.
💵 Maximum Deduction Available Under Section 123
The maximum deduction allowed under Section 123 is:
✅ ₹1,50,000 per financial year
This overall limit includes all eligible investments and payments covered under the section.
For example:
| Investment Type | Amount Invested |
|---|---|
| PPF Contribution | ₹50,000 |
| ELSS Investment | ₹40,000 |
| Life Insurance Premium | ₹35,000 |
| Tax Saver FD | ₹25,000 |
| Total Deduction | ₹1,50,000 |
Even if total eligible investments exceed ₹1.5 lakh, the deduction will be restricted to ₹1.5 lakh only.
🏦 Eligible Investments and Payments Under Section 123
Section 123 covers a wide range of tax-saving investments and expenses. Some of the major eligible deductions are explained below.
1️⃣ Public Provident Fund (PPF)
Contributions made to a PPF account qualify for deduction under Section 123.
🔹 Key features:
• Government-backed savings scheme
• Long-term investment option
• Interest earned is tax-free subject to applicable provisions
• Suitable for conservative investors
2️⃣ Employee Provident Fund (EPF)
Employee contributions to EPF are eligible for deduction under Section 123.
This is commonly claimed by salaried employees whose EPF deductions are automatically reflected in salary structures.
3️⃣ Life Insurance Premium 🛡️
Premium paid towards life insurance policies for:
• Self
• Spouse
• Children
is eligible for deduction subject to prescribed conditions.
The deduction is generally available only if the premium does not exceed the prescribed percentage of the sum assured.
4️⃣ Equity Linked Savings Scheme (ELSS) 📈
Investments made in ELSS mutual funds qualify for deduction under Section 123.
✨ Features of ELSS:
• Market-linked returns
• Shortest lock-in period among tax-saving instruments
• Potential for higher long-term returns
ELSS is preferred by taxpayers seeking equity exposure along with tax benefits.
5️⃣ National Savings Certificate (NSC) 📜
Investment in NSC issued by the government is also eligible for deduction.
It is considered a low-risk fixed-income investment option.
6️⃣ Sukanya Samriddhi Yojana (SSY) 👧
Deposits made in Sukanya Samriddhi accounts for girl children qualify for deduction under Section 123.
The scheme aims to encourage long-term savings for the education and marriage expenses of daughters.
7️⃣ Tax Saving Fixed Deposits 🏛️
Fixed deposits with a lock-in period of five years with scheduled banks are eligible for deduction.
These deposits provide guaranteed returns and are preferred by risk-averse taxpayers.
8️⃣ Home Loan Principal Repayment 🏠
Repayment of the principal amount of a housing loan qualifies for deduction under Section 123.
The deduction is available for:
• Purchase of residential property
• Construction of residential property
However, certain conditions regarding ownership and holding period must be satisfied.
9️⃣ Tuition Fees for Children 🎓
Tuition fees paid for full-time education of children in India are eligible for deduction.
The deduction is available for up to two children.
Only tuition fees qualify; expenses such as transportation, hostel fees, donations, and development charges are generally excluded.
🔟 Senior Citizens Savings Scheme (SCSS) 👴👵
Deposits made under SCSS are also eligible for deduction under Section 123.
This scheme is specifically designed for senior citizens and offers stable returns.
📚 Schedule XV Under the Income Tax Act, 2025
Under the Income Tax Act, 2025, many eligible deductions and investments have been shifted to schedules for easier reference.
The detailed list of investments eligible under Section 123 is now contained in:
📖 Schedule XV of the Income Tax Act, 2025
This structural change aims to simplify legal drafting and improve readability of the Act.
⚖️ Difference Between Section 80C and Section 123
| Particulars | Section 80C – Income Tax Act, 1961 | Section 123 – Income Tax Act, 2025 |
|---|---|---|
| Applicable Law | Income Tax Act, 1961 | Income Tax Act, 2025 |
| Deduction Limit | ₹1.5 lakh | ₹1.5 lakh |
| Eligible Taxpayers | Individuals & HUFs | Individuals & HUFs |
| Nature of Benefit | Tax-saving deduction | Tax-saving deduction |
| Eligible Investments | Mentioned in the section itself | Referenced through Schedule XV |
| Objective | Encourage savings | Encourage savings |
⚠️ Important Conditions for Claiming Deduction
Taxpayers should keep the following conditions in mind while claiming deduction under Section 123:
• Investments must be made during the relevant financial year
• Proper investment proofs and payment receipts should be maintained
• The total deduction cannot exceed ₹1.5 lakh
• Certain investments carry lock-in periods
• Early withdrawal from specified schemes may lead to reversal of benefits
• The deduction may not be available under certain tax regimes, subject to applicable provisions
📊 Tax Planning Benefits of Section 123
💸 Reducing Taxable Income
A deduction of ₹1.5 lakh can significantly reduce overall tax liability.
📈 Encouraging Long-Term Savings
Most eligible instruments promote disciplined financial planning.
👴 Building Retirement Corpus
Schemes like EPF, PPF, and SCSS support retirement security.
🧩 Diversifying Investments
Taxpayers can allocate funds across:
• Fixed income instruments
• Equity-linked investments
• Insurance products
• Government-backed schemes
❌ Common Mistakes Taxpayers Should Avoid
Some common issues while claiming deduction under Section 123 include:
• Claiming deduction for non-eligible payments
• Including registration charges or donations incorrectly
• Claiming tuition fees for more than two children
• Investing after the financial year-end
• Ignoring lock-in conditions
• Failing to maintain supporting documents
Careful documentation and timely investments can help avoid disputes during assessment or verification.
🏛️ Applicability of Section 123 Under the New Tax Regime
Taxpayers should carefully evaluate whether deductions under Section 123 are available under the tax regime they choose.
Under the new framework, certain deductions may not be available if the taxpayer opts for concessional tax regimes. Therefore, taxpayers should compare tax liability under both regimes before making investment decisions.
✅ Conclusion
Section 123 of the Income Tax Act, 2025 continues the legacy of Section 80C by providing deductions for a wide range of investments and savings instruments. While the section number and drafting structure have changed, the core tax-saving benefits remain substantially similar.
The provision continues to play an important role in tax planning for salaried individuals, professionals, and families by encouraging systematic savings, insurance coverage, retirement planning, and long-term wealth creation.
Taxpayers should understand the revised section references under the Income Tax Act, 2025 and maintain proper investment records to ensure smooth compliance and maximum tax benefits.