What Is Section 123 of the Income Tax Act, 2025? A Detailed Guide

If you've recently heard about Section 123 of the Income Tax Act, 2025, you may be wondering whether it's a new tax-saving provision. The short answer is no.
 

The Income Tax Act, 2025, which came into effect on 1 April 2026, replaces the Income-tax Act, 1961 with a simplified legal framework. As part of this transition, many provisions have been renumbered. One of the most notable changes is that the well-known Section 80C is now broadly reflected as Section 123.
 

For taxpayers, however, the purpose remains largely unchanged. Section 123 continues to encourage long-term savings by allowing eligible individuals and HUFs to claim deductions on specified investments and expenses, subject to the prescribed conditions.
 

Whether you're paying premiums for a life insurance plan, investing in PPF, contributing to EPF, or repaying the principal on your home loan, these investments may help reduce your taxable income under Section 123.
 

In this guide, we'll explain what Section 123 is, how it compares with the earlier Section 80C, who can claim the deduction, the investments that qualify, and how you can make the most of this tax-saving provision.

 

What Is Section 123?
 

Section 123 of the Income Tax Act, 2025 is the provision that allows eligible individuals and Hindu Undivided Families (HUFs) to claim deductions on certain investments and expenses. These deductions can reduce your taxable income, provided you meet the applicable conditions.
 

If you've previously claimed deductions under Section 80C, you'll notice that Section 123 serves a very similar purpose. It is not a new tax benefit, but rather a renumbered provision under the new Income Tax Act, 2025.
 

The deduction covers a range of investments that support long-term financial planning. These include qualifying term insurance plans, life insurance premiums, Public Provident Fund (PPF), Employees' Provident Fund (EPF), Equity Linked Savings Schemes (ELSS), National Savings Certificates (NSC), tax-saving fixed deposits, Sukanya Samriddhi Yojana, home loan principal repayment and certain education-related expenses.
 

The maximum deduction available under Section 123 continues to be ₹1,50,000 in a financial/Tax year, subject to the provisions of the Act.
 

While tax savings are an important advantage, the investments covered under Section 123 are also designed to help individuals build long-term financial security. For example, a life insurance policy helps protect your family's financial future, while retirement-oriented investments such as PPF and EPF support long-term wealth creation.

 

Section 123 vs Section 80C: What's Changed?
 

One of the most common questions taxpayers have is whether Section 123 introduces a new deduction. In reality, the tax-saving framework remains broadly the same. The primary change is that the provision has been renumbered under the new Income Tax Act, 2025.

 

For most taxpayers, there is no major change in the way tax-saving investments work. If you're already familiar with Section 80C, understanding Section 123 will be straightforward.

 

Who Can Claim Deductions Under Section 123?
 

Section 123 is available to eligible Individuals and Hindu Undivided Families (HUFs) who make qualifying investments or incur eligible expenses during the financial/Tax year.
 

This means the deduction may generally be claimed by:
 

• Salaried employees
   
• Self-employed professionals
   
• Business owners
   
• Hindu Undivided Families (HUFs)
   
• Non-Resident Indians (NRIs), where the applicable provisions permit
   

Companies, partnership firms and LLPs are generally not eligible to claim deductions under this section.
 

It's also important to remember that Section 123 deductions are available under the old tax regime only. Taxpayers should compare both tax regimes before filing their income tax return to determine which option is more beneficial for their financial situation.

 

What is the Maximum Deduction Limit Under Section 123
 

The maximum deduction available under Section 123 is ₹1,50,000 in a financial/Tax year.
 

This is an overall limit, which means the deduction applies to the combined value of all eligible investments and expenses—not to each investment separately.
 

For example, if you invest:
 

• ₹40,000 in PPF
   
• ₹60,000 towards qualifying life insurance premiums
   
• ₹70,000 in ELSS
   

your total eligible investments amount to ₹1,70,000. However, the maximum deduction you can claim under Section 123 remains ₹1,50,000, subject to the applicable conditions.
 

While investing beyond this limit may help you achieve your long-term financial goals, it does not increase the deduction available under Section 123.

 

Investments and Expenses Eligible for Deduction Under Section 123
 

Section 123 covers a wide range of investments and expenses that promote long-term savings, financial protection and wealth creation. Instead of investing only for tax savings, choose options that align with your financial goals and risk appetite.
 

Insurance-Based Investments
 

Premiums paid towards eligible insurance products may qualify for deduction under Section 123.
 

These include:
 

• Term insurance plans
   
• Unit Linked Insurance Plans
   
• Savings Insurance Plans
   

While these products may offer tax benefits, they are primarily designed to provide financial security or support long-term financial planning. For example, a term insurance plan helps protect your family's financial future, while a ULIP combines life insurance with market-linked investments.

 

Retirement and Long-Term Savings
 

Several government-backed savings schemes also qualify under Section 123.
 

These include:
 

• Public Provident Fund (PPF)
   
• Employees' Provident Fund (EPF)
   
• National Savings Certificate
   
• Tax-saving fixed deposits
   
• Senior Citizen Savings Scheme (SCSS)
   
• Sukanya Samriddhi Yojana
   

Each of these schemes has its own investment limits, lock-in period and withdrawal rules, so it's worth understanding how they align with your financial goals before investing.

 

Market-Linked Investments
 

Equity Linked Savings Schemes (ELSS) are tax-saving mutual funds that primarily invest in equities. While they offer the potential for long-term wealth creation, their returns are market-linked and may fluctuate over time.
 

Similarly, qualifying ULIPs combine investment with insurance and may suit investors who are comfortable with market-linked products.

 

Other Eligible Expenses
 

Apart from investments, Section 123 also allows deductions on certain qualifying expenses, including:
 

• Eligible home loan principal repayment
   
• Tuition fees paid for the full-time education of up to two children in India
   
• Contributions towards qualifying deferred annuity plans
   

Since every investment and expense has specific eligibility requirements, taxpayers should review the applicable conditions before claiming the deduction.

 

Conditions for Claiming Deduction on Life Insurance Premiums
 

Premiums paid towards qualifying life insurance policies may be eligible for deduction under Section 123, provided certain conditions are met.
 

Generally:
 

• The policy should cover yourself, your spouse or your children. A HUF may claim the deduction for policies covering its members.
   
• The premium should be paid during the relevant financial/tax year.
   
• The deduction is subject to the applicable premium limits prescribed under the Income Tax Act, 2025.
   
• Keep premium receipts and policy documents safely, as they may be required while filing your income tax return or for future verification.
   

If you're new to life insurance, understanding terms such as the policyholder, insurer and insured, and the role of IRDAI can help you make informed decisions before purchasing a policy.

 

Lock-in Period Rules Under Section 123
 

Many investments covered under Section 123 are intended to encourage long-term financial planning and therefore come with a lock-in period. The duration varies depending on the selected investment plan or option.
 

For example:
 

• ELSS has a mandatory three-year lock-in period.
   
• Tax-saving fixed deposits generally have a five-year lock-in.
   
• PPF, Sukanya Samriddhi Yojana, and certain other government-backed schemes have their own withdrawal rules.
   
• ULIPs are subject to a mandatory lock-in period before partial withdrawals are allowed.
   

Similarly, surrendering certain life insurance policies or withdrawing from eligible investments before the prescribed period may affect the tax benefits claimed. Before making an early withdrawal, check the applicable terms and tax implications to avoid any unexpected consequences.

 

How to Claim Deductions Under Section 123
 

Claiming a deduction under Section 123 is straightforward if you've made eligible investments during the financial/tax year.
 

Here's a simple checklist:
 

• Invest in eligible tax-saving instruments or incur qualifying expenses.
   
• Keep supporting documents such as premium receipts, investment statements and loan certificates.
   
• Declare eligible investments to your employer, if applicable.
   
• Claim the deduction while filing your income tax return under the old tax regime.
   
• Retain your records for future reference, if required.
  
   

Does Section 123 Apply Under the New Tax Regime?
 

Section 123 deductions are available only if you opt for the old tax regime.
 

The new tax regime offers lower tax rates but allows fewer deductions and exemptions. As a result, taxpayers choosing the new regime may not be able to claim the deductions available under Section 123.
 

Before filing your income tax return, compare your tax liability under both regimes. The better option depends on your income, eligible deductions and overall financial situation.

 

Tax Planning Tips to Maximise Section 123 Benefits
 

While tax savings are important, your investment decisions should also support your long-term financial goals.
 

Here are a few practical tips:
 

• Start early: Investing throughout the year can help you avoid rushed decisions towards the end of the financial year.
   
• Diversify your investments: Instead of relying on a single product, consider a mix of insurance, retirement and market-linked investments based on your financial goals.
   
• Think beyond tax savings: Choose investments that align with your protection, wealth creation or retirement objectives.
   
• Include life insurance in your financial plan: A qualifying life insurance policy can provide financial protection for your loved ones while also offering potential tax benefits under Section 123.
  
   

Common Mistakes to Avoid
 

Avoid these common errors while claiming deductions:
 

• Claiming investments that are not eligible under Section 123.
   
• Missing or incomplete documentation.
   
• Ignoring lock-in period requirements.
   
• Choosing a tax regime without comparing the overall tax impact.
   

Planning your investments early and maintaining proper records can make the deduction process much smoother.

 

Why Life Insurance Remains an Important Tax-Saving Option
 

While tax benefits are valuable, life insurance should primarily be viewed as a financial protection tool rather than simply a way to save tax.
 

A qualifying life insurance policy can help provide financial security for your family while also offering potential tax benefits under Section 123, subject to the applicable conditions. Before choosing a policy, it's equally important to consider factors such as your family's financial needs, affordability, policy features and the insurer's claim settlement ratio.

 

Conclusion
 

Section 123 of the Income Tax Act, 2025 is the new provision governing deductions for eligible tax-saving investments and expenses. Although it replaces the familiar Section 80C under the Income-tax Act, 1961, its overall objective remains largely the same—encouraging long-term savings while helping eligible taxpayers reduce their taxable income.
 

Whether you're investing in life insurance, provident funds, ELSS, home loan repayment or other qualifying options, understanding the eligibility conditions and your chosen tax regime can help you make better-informed financial decisions.
 

For personalised tax advice, consider consulting a qualified tax professional.

 

FAQs
 

Is Section 123 the replacement for Section 80C?
 

Yes. Section 123 broadly replaces the earlier Section 80C under the Income-tax Act, 1961 as part of the Income Tax Act, 2025. While the section number has changed, the purpose of encouraging eligible tax-saving investments remains largely the same.

 

What is the maximum deduction available under Section 123?
 

Eligible individuals and HUFs can generally claim deductions of up to ₹1,50,000 in a financial/tax year across all qualifying investments and expenses, subject to the applicable conditions.

 

Are ULIPs covered under Section 123?
 

Yes. Premiums paid towards qualifying ULIPs may be eligible for deduction under Section 123, subject to the prescribed conditions and the overall deduction limit.

 

Can NRIs claim deductions under Section 123?
 

NRIs with taxable income in India may be eligible to claim deductions on certain qualifying investments, depending on the applicable provisions and their chosen tax regime.

 

Is term insurance premium eligible under Section 123?
 

Premiums paid towards qualifying term insurance plans may be eligible for deduction under Section 123, provided the policy satisfies the applicable conditions under the Income Tax Act, 2025.

This blog has been reviewed in consultation with the our tax experts