Section 123 of the Income-tax Act, 2025 — ₹1,50,000 Deduction for Investments & Payments (the New Section 80C)

In plain language

What Section 123 is in plain English

Section 123 of the Income-tax Act, 2025 is the new home of the deduction that every Indian taxpayer knew as Section 80C under the old Income-tax Act, 1961. When the 2025 Act came into force on 1 April 2026 (applicable from Tax Year 2026-27 onwards, as amended by the Finance Act, 2026), the government renumbered and re-organised the law. The popular ₹1.5 lakh tax-saving deduction did not disappear — it simply moved to Section 123, with the list of eligible investments and payments now placed in a single, tidy table called Schedule XV.

• The deduction: Up to ₹1,50,000 can be reduced from your gross total income if you invest or spend on the specified instruments during the year.
• The idea: Reward long-term saving, insurance, retirement planning, home ownership and children's education by giving tax relief on the money you park in these instruments.

Who can claim it

• Individuals — salaried employees, self-employed professionals, freelancers and business owners.
• Hindu Undivided Families (HUFs).
• Not available to companies, partnership firms, LLPs, AOPs or BOIs.
• Only under the old tax regime. If you opt for the concessional new regime, you forgo Section 123 (and most other Chapter-VIA style deductions). This is the single most important practical point for taxpayers in 2026.

What counts — the Schedule XV list

Section 123 consolidates what used to be spread across Sections 80C, 80CCC (pension fund annuities) and 80CCD(1) (employee/self NPS contribution) of the 1961 Act. The most-used eligible items include:

• Life insurance premium (self, spouse, children) — capped at 10% of the sum assured for policies issued on or after 1 April 2012.
• Employee/Public Provident Fund (EPF and PPF).
• ELSS mutual funds (3-year lock-in) and ULIPs.
• 5-year tax-saver bank fixed deposits, NSC, Senior Citizens Savings Scheme, Sukanya Samriddhi Yojana.
• NPS Tier-I contribution (the erstwhile 80CCC/80CCD(1) portion) and notified pension funds.
• Home loan principal repayment plus stamp duty and registration charges on house purchase.
• Tuition fees for up to two children (full-time education in India).

Key conditions and limits

• ₹1.5 lakh is a combined ceiling, not a per-instrument limit. Amounts across all eligible items are added and the total deduction is capped at ₹1,50,000.
• Deduction is on a payment basis — you get it in the year you actually pay or deposit.
• Lock-ins and clawbacks apply. For example, ELSS has a 3-year lock-in; surrendering a life policy or withdrawing a tax-saver FD early can cause earlier deductions to be reversed and taxed.

How it interacts with other sections

Section 123 works alongside the new pension and health provisions. The extra NPS deduction of ₹50,000 that was Section 80CCD(1B) is now Section 124(3) and is over and above the ₹1.5 lakh limit — so a diligent taxpayer can reach ₹2,00,000 in combined retirement-linked relief. Health insurance relief (old 80D) and home-loan interest sit in their own separate sections. Section 123 does not touch those; it strictly governs the ₹1.5 lakh investment-and-payment basket.

Practical implications

For most middle-class taxpayers, Section 123 remains the backbone of tax planning under the old regime. Before choosing a regime each year, compare: the flat lower rates of the new regime versus the old regime rates minus your Section 123 (and other) deductions. If your genuine investments already approach ₹1.5 lakh — say through EPF, a home-loan principal and a term-insurance premium — the old regime plus Section 123 often still wins.