Section 123 (Schedule XV) Deduction: Eligible Investments & Maximum Tax Benefits

Section 123 offers a smart way to lower your tax liability while building your financial future. Be it insurance plans or provident fund, you can invest in a range of instruments to reduce tax liability.

Section 123 of the Income Tax Act, 2025 states “An individual or a Hindu undivided family, shall be allowed a deduction of the whole of the amount paid or deposited in the tax year, being the aggregate of the sums enumerated in Schedule XV, as does not exceed Rs. 150000, while computing the total income for that year, subject to the conditions specified in that Schedule.”

Individuals

Any Indian citizen or Non-Resident Indian (NRI) earning taxable income can claim deductions under this section. This long list includes salaried employees, business owners, and even professionals. The tax rule, in essence, encourages disciplined financial planning under the Old Income Tax Regime system.

However, NRIs can only invest in selected options such as ELSS, ULIPs, and life insurance premiums. Instruments like PPF, NSC, and Sukanya Samriddhi Yojana are not available to NRIs.

HUFs (Hindu Undivided Families)

HUFs are separate legal entities and they can claim Income Tax Section 80C deductions. They can invest in eligible options like life insurance or ELSS, and the Karta of the HUF can significantly reduce tax outgo for the entire family unit.

Senior Citizens and Other Eligible Taxpayers

The good news is that citizens aged 60 years or more are eligible under Section 123 of Income Tax Act. They may prefer low-risk instruments like SCSS or PPF. The deduction cap remains the same at ₹1.5 lakh per financial year.

You’ll need to invest in eligible options or spend on approved expenses. Just make sure it’s all done within the same financial year. If not, no benefit shows up in your tax return.

A. Schedule XV Deduction List: Eligible Investments and Schemes

The avenues listed below need smart and pragmatic use. They help cut taxable income only if certain lock-in requirements are met.

• Equity Linked Savings Scheme (ELSS)

As popular as ULIPs, ELSS at its core is a mutual fund that offers tax benefits on investment. It comes with a three-year lock-in. Primarily, the asset class of choice is stocks or equities. Returns are market-linked. They aim to capture long-term growth potential in sync with the Sensex/Nifty or any other specified benchmark.

• Employee Provident Fund (EPF)

Trusted by the older generation and also the new one, EPF is a retirement fund where both employee and employer contribute a small sum steadily over the years. Importantly, the employee’s share qualifies for deduction. Interest earned is tax-free, up to ₹2.5 lakh of employee contribution annually (₹5 lakh where the employer does not contribute).

• National Savings Certificate (NSC)

Among the traditional options, NSC is a five-year fixed-income scheme backed by the Government. When you entrust your funds, this system earns compound interest annually. Typically, it is ideal for risk-averse savers looking for assured returns. Note that NSC is not available to NRIs.

• National Pension Scheme (NPS)

NPS is designed for retirement planning. It offers clear tax benefits under section 123 & Schedule XV, Para 1(x), which is included in the Section 123 cap. You can also claim an extra ₹50,000 under section 124(3), over and above the ₹1.5 lakh limit.

• Unit Linked Insurance Plans (ULIPs)

ULIPs are a hybrid product that smartly mixes investment and life cover. You can choose between equity, debt, or balanced fund options for your investment. The lock-in is five years, and returns depend on market performance. Some plans may include loyalty additions or bonuses, which can increase overall returns. In the event of an unfortunate incident, the life cover provides financial protection to the nominee.

• Tax-Saving Fixed Deposits (5-Year FD)

These are term deposits with banks that qualify under Section 123. The lock-in is five years. Do note that the interest earned in a tax-saving FD is taxable. They are preferred by those seeking capital protection and have almost no appetite for risk.

• Public Provident Fund (PPF)

PPF is a government-backed savings plan with a 15-year maturity. Contributions up to ₹1.5 lakh a year are deductible. It also offers tax-free interest and withdrawal after maturity. This scheme is not open to NRIs.

• Senior Citizen Savings Scheme (SCSS)

SCSS is for individuals above 60. It offers guaranteed returns, quarterly interest payouts, and tax deductions under section 123. The tenure is five years, extendable by three.

• Sukanya Samriddhi Yojana

This is aimed at the girl child’s future. Parents can open an account before the girl turns 10. The scheme matures when she turns 21 or upon marriage after 18.

• Infrastructure Bonds

Infra bonds help fund government infrastructure projects. For investors, they offer fixed interest, and investments are eligible for deduction under Section 123, subject to issuance by specified institutions.

B. Expenses That Qualify for Section 123 Deduction

Some expenses you already incur may qualify, too. Here is a list.

• Life Insurance Premiums

Premiums paid for Insurance policies are eligible for deduction. The policy must be in your or your family’s name to qualify.

• Tuition Fees Paid for Children

Yes, there is good news for parents. You can claim fees paid for up to two children per financial year. It must be full-time education in India at a recognised school, college, or university.

• Home Loan Principal Repayment

EMIs include interest and principal. The principal portion qualifies under Section 80C if the property in question isn’t sold within five years of possession. Otherwise, the deduction claimed earlier will be added back to your taxable income in the year of sale.

• Contribution to Pension Funds (Section 123 & Schedule XV)

Premiums paid to annuity plans of insurers also fall under this deduction. So, it is important to plan your allocations carefully to optimise the benefit.

Section 123 covers investments and expenses for wealth creation and asset acquisition. Section 126, in contrast, is for medical insurance premiums only.

SBI Life offers plans that qualify under Section 123 of Income Tax Act. Whether it’s a term plan, ULIP, or retirement annuity, your premium payments can help. So, reduce your taxable income while securing financial protection for your family.

Different instruments under Section 123 deduction list have different holding periods. For instance, ULIPs require 5 years, PPF needs 15 years, and ELSS has a 3-year lock-in. Exiting early may reverse the tax benefit. That said, these are technically lock-in periods. You should try to stay the full tenure of the investment as per your financial needs.

When used wisely, Section 123 deductions can ease your tax burden and help secure your future. Tax filers should choose instruments that suit their life stage, whether it’s insurance, PPF, ELSS, or tuition fees. The goal should always be to stay consistent and remain invested through the ups and downs of the investment.

Our content given in this article is as per the existing provisions, laws and regulations as per the Income Tax Act, 2025 and Income Tax Rules, 2026 issued thereunder. Tax laws are subject to amendments made thereto from time to time. The benefits / guidance mentioned herewith should not be considered as opinion / view of the Company. We request to seek independent view from your personal tax advisor on applicable tax benefits / guidance under the said article.