This was Section 80C under the Income-tax Act 1961. See the mapping
Chapter VIII: Deductions
Section 123, Income-tax Act 2025: Deduction for life insurance premia, deferred annuity, provident fund contributions, etc.
Plain-English summary
This is the new home of the investment deduction everyone knew as Section 80C. If you pay the old-regime way, you can deduct up to ₹1.5 lakh a year for the familiar basket: EPF and PPF contributions, life insurance premiums, ELSS mutual funds, 5-year tax-saver fixed deposits, home-loan principal repayment, children's tuition fees, NSC and Sukanya Samriddhi deposits. The limit, the basket and the lock-in rules carry over from the 1961 Act. Only the section number changed. Under the default new regime this deduction is not available.
What changed when Section 80C became Section 123?
The number and the furniture, not the money. The deduction stays at ₹1,50,000 per tax year for the same basket of payments and investments. What moved is the list itself: it left the section's body and now sits in Schedule XV of the new Act, with Section 123 granting the deduction and the Schedule naming what qualifies.
The 1961 Act reached the same result through a maze. Section 80C held the list, 80CCC covered pension-plan premiums, 80CCD covered pension-scheme contributions, and 80CCE tied all three under one ₹1.5 lakh ceiling. Practitioner readings of the new Act fold the pension items into the Schedule XV basket alongside the rest, so one section and one schedule now do the work of four sections.
Section number cross-checked against multiple published copies of the enacted Act.†
Who can claim the deduction?
Individuals and Hindu Undivided Families, and only on the old regime. Companies, firms and LLPs have no claim, and neither does anyone who stays on the default new regime.
- Individuals can claim payments made for themselves and, for several items, for family: life insurance and PPF count when taken for your spouse or children, tuition fees count only for your own children, and a Sukanya Samriddhi account is opened for a daughter.
- Payments for parents never qualify, however dependent they are. A premium on your mother's policy earns nothing here (health cover for parents has its own section, the old 80D, now Section 126).
- HUFs can claim for members, but several items are individual-only in practice: tuition fees, Sukanya Samriddhi and provident fund contributions among them.
Which investments and payments fill the basket?
Eleven families of items cover almost every rupee people actually claim. Each comes with its own lock-in or holding rule, and the lock-ins are where the traps live:
| Item | Lock-in or holding rule | Worth knowing |
|---|---|---|
| EPF / VPF (your own contribution) | Held until withdrawal per EPF rules | Withdrawing within 5 years of continuous service makes past claims taxable |
| PPF | 15 years | Partial withdrawals from year 7; extendable in 5-year blocks |
| ELSS mutual funds | 3 years | Shortest lock-in in the basket; returns are market-linked |
| Life insurance premium | Keep the policy 2 years minimum | Premium must stay within 10% of sum assured for post-2012 policies |
| ULIPs | 5 years | Exit earlier and past deductions are reversed |
| Tax-saver bank FD | 5 years | No premature closure, no loan against it |
| NSC | 5 years | Accrued interest is taxable but re-qualifies for the deduction until the final year |
| Senior Citizens' Savings Scheme | 5 years | Open to 60-plus investors; extendable |
| Sukanya Samriddhi | Matures 21 years from opening | For a daughter under 10; partial withdrawal once she turns 18 |
| Home-loan principal + stamp duty | Keep the house 5 years from possession | Sell earlier and every past claim is added back to your income |
| Children's tuition fees | None | Up to 2 children, full-time education in India, tuition component only |
Basket contents per practitioner summaries of Schedule XV.†
How does the ₹1.5 lakh cap work?
One ceiling for everything combined. ₹1,50,000 is the most the basket can deduct in a tax year, whether you get there with one PPF deposit or six different items. Anything past the cap earns no deduction, though the investment itself is unaffected.
The cap runs on a payment basis: what counts is the year the money actually leaves you, not the year a premium was due or a fee was billed. Spouses each have their own ₹1.5 lakh cap, but the same payment can only be claimed by whoever made it, never by both.
The extra ₹50,000 deduction for NPS contributions (Section 80CCD(1B) of the 1961 Act) sits outside this cap and survives as a separate provision.†
When do claimed deductions get reversed?
Four exits undo past claims, adding them back to your income in the year you break the rule:
- Selling the house within 5 years of possession: every principal and stamp-duty claim you made comes back as income in the sale year. Interest claimed under Section 22 is untouched.
- Dropping a life policy early: terminate a single-premium policy within 2 years, or pay fewer than 2 years' premiums on a regular policy, and the earlier deduction is reversed.
- Surrendering a ULIP within its 5-year lock-in: same reversal.
- Withdrawing EPF within 5 years of continuous service: contributions you claimed become taxable, and the fund may deduct tax at source on the payout.
What counts in the year of payment?
Only money that actually moved by 31 March. A premium due in February but paid in April belongs to the next tax year. Stamp duty and registration charges count solely in the year you pay them, which is usually the purchase year, with or without a home loan.
The March deadline is why tax-saver products sell hardest in the last quarter. If you are short of the cap in January, the order of operations matters: check what the year has already banked (EPF deducted from salary, premiums on auto-debit, school fees, home-loan principal from your amortisation schedule) before putting new money anywhere.
Is Section 123 available under the new regime?
No. The deduction exists only for taxpayers who opt out of the default new regime under Section 202 and pay old-regime slab rates. On the new regime the basket deducts nothing, whatever you invested.
That does not make the investments pointless on the new regime: EPF still builds your retirement corpus, PPF still compounds tax-free, a term policy still protects your family. What disappears is only the deduction. The regime choice itself is arithmetic, and the third worked example below runs it: a full ₹1.5 lakh basket on its own rarely beats the new regime's lower slab tax at middle incomes. Old-regime filers who win usually stack this section with home-loan interest (Section 22), health premiums (Section 126) and HRA.
How should you fill the basket?
The order most CAs suggest, cheapest discipline first:
- Count the auto-fills before buying anything: EPF alone puts many salaried people most of the way to ₹1.5 lakh, and premiums, tuition and home-loan principal often finish the job without a single new rupee.
- Match lock-ins to goals: ELSS frees up in 3 years but swings with the market; PPF is guaranteed but holds 15. Money you may need soon does not belong in either.
- Buy insurance for protection, not for this deduction: a term plan's premium qualifies just as well as an expensive endowment policy's, at a fraction of the cost for the same cover.
- Avoid the March rush: hurried purchases are where mis-sold policies happen, and a February start gives you time to compare.
What proof does the claim need?
Nothing is attached to the return, but everything must be producible. Keep premium receipts, the PPF or Sukanya passbook, ELSS and FD statements, fee receipts showing the tuition split, and your lender's repayment schedule separating principal from interest.
Salaried taxpayers should hand the same proofs to their employer with Form 12BB, usually by January, so the deduction lands in TDS instead of waiting for a refund. If the department asks later, the paper trail is the claim.
Worked examples
Salaried employee, old regime
Ritu is on the old regime at the 30% slab. In TY 2026-27 she contributes ₹1,10,000 to EPF, pays a ₹28,000 LIC premium and puts ₹40,000 into PPF.
| EPF contribution | ₹1,10,000 |
| LIC premium | ₹28,000 |
| PPF deposit | ₹40,000 |
| Total eligible payments | ₹1,78,000 |
| Deduction allowed (₹1.5 lakh cap) | ₹1,50,000 |
| Tax saved at 30% slab, with cess | ₹46,800 |
The cap leaves ₹28,000 of her payments with no tax benefit this year.
Basket totals ₹1.88 lakh against the ₹1.5 lakh cap
Arun is on the old regime at the 20% slab. He deposits ₹50,000 in PPF, runs ₹60,000 of ELSS SIPs, pays a ₹30,000 term premium and ₹48,000 of school tuition.
| PPF deposit | ₹50,000 |
| ELSS SIPs | ₹60,000 |
| Term insurance premium | ₹30,000 |
| School tuition fees | ₹48,000 |
| Total eligible payments | ₹1,88,000 |
| Deduction allowed (₹1.5 lakh cap) | ₹1,50,000 |
| Tax saved at 20% slab, with cess | ₹31,200 |
The excess ₹38,000 earns nothing this year; the separate ₹50,000 NPS deduction is the usual next home for it.†
₹13 lakh salary: does a full basket beat the new regime?
On ₹13,00,000 of salary in TY 2026-27, comparing a full old-regime basket against the new regime. Old regime: the ₹50,000 standard deduction and a full ₹1,50,000 basket. New regime: the ₹75,000 standard deduction, with marginal relief near the ₹12 lakh line.
| Old regime tax on ₹11,00,000 taxable, with cess | ₹1,48,200 |
| New regime tax on ₹12,25,000 taxable, with cess | − ₹26,000 |
| Old regime costs more by | ₹1,22,200 |
Section 123 alone rarely settles the regime choice; it takes home-loan interest, health premiums or HRA stacked on top to change the answer.
Read the section as enacted
The statutory text is loaded verbatim from the Gazette copy of the Income-tax Act 2025, never from secondary sources or memory. The CA-checked copy appears here the moment it clears review.
Section 123 FAQs
Can I claim my parents' LIC premium or PPF deposit under Section 123?
No. Life insurance and PPF count only when taken for yourself, your spouse or your children. Payments for parents do not qualify however dependent they are; the deduction that does cover parents is Section 126 (the old 80D), for their health insurance.
Does my employer's EPF contribution count towards the ₹1.5 lakh?
No. Only your own contribution, including any voluntary top-up (VPF), enters the basket. The employer's matching share is a separate benefit with its own tax treatment and never touches your Section 123 cap.
Which school fees qualify as tuition?
Only the tuition component of fees for full-time education at an institution in India, for up to two children. Donations, development fees, transport, hostel and late-payment charges are all excluded, so ask the school for a receipt that splits the components.
Can my spouse and I each claim ₹1.5 lakh?
Yes. Each taxpayer has an independent cap, and a couple can shelter ₹3 lakh between them on the old regime. The same rupees can only be claimed once though: whoever actually paid claims it, so route payments deliberately when one of you sits in a higher slab.
What happens if I invest more than ₹1.5 lakh?
The deduction stops at ₹1,50,000 and the excess simply earns no tax benefit that year. The common overflow home is the separate ₹50,000 NPS deduction (the old 80CCD(1B)), which sits outside this cap.†
Is Section 123 available under the new regime?
No. It is an old-regime deduction only. On the default new regime the basket deducts nothing, and for incomes up to ₹12 lakh the Section 156 rebate usually makes the point moot by zeroing the tax anyway.
I sold my flat three years after possession. What happens to my old claims?
Every home-loan principal and stamp-duty deduction you claimed for that house is added back to your income in the year of sale, because the 5-year holding rule broke. Interest deductions under Section 22 (the old 24(b)) are not reversed.
Do NSC interest accruals need fresh cash to qualify?
No. The interest that accrues each year on an NSC is taxable as income, but it is treated as reinvested in the certificate, so the same amount re-enters the basket as a fresh deduction every year except the last one, when it pays out instead.