Section 123 Deductions 2026: Complete List of All Options

Section 123 Deductions 2026

Part of the Income Tax India 2026 : Income Tax India 2026 : A Complete Guide

Every April, millions of salaried Indians ask their HR the same question: “Where should I invest to save tax under 123?”

Most people know ELSS, PPF, and LIC. Few know all the options. Almost nobody compares them by return, lock-in, and risk before investing. They just rush to fill the Rs 1.5 lakh limit before the March deadline.

This article gives you the complete picture — every eligible instrument under Section 123, how much you can claim, what the lock-in period is, and how to choose the best option for your goals.

Important upfront: Section 123 deductions are available ONLY in the old tax regime. If you are in the new tax regime, none of these deductions apply. Before planning 123 investments, confirm which regime you are in.

Rs 1.5 Lakh Maximum 123 deduction per year (unchanged since 2014)

Old Regime 123 available ONLY in old tax regime

Rs 46,800 Maximum tax saved at 30% bracket (Rs 1.5L x 30% + 4% cess)

10+ Different instruments eligible under Section 123

What is Section 123 – The Basics

Section 123 of the Income Tax Act allows individuals and Hindu Undivided Families (HUFs) to reduce their taxable income by up to Rs 1,50,000 per financial year by investing in specified financial instruments or incurring eligible expenditures. The Rs 1,50,000 limit is the combined ceiling for Sections 123 (pension funds), and 124) (NPS employee contribution).

Key Rule	Detail
Who can claim	Individual taxpayers and HUFs only. Companies, firms, and LLPs cannot claim 123.
Maximum deduction	Rs 1,50,000 per financial year — aggregate of 123 + 124
Regime availability	Old tax regime ONLY. Not available in new regime.
When to invest	Any time during the financial year — April 1 to March 31
Tax saving at 30% bracket	Rs 46,800 (Rs 1.5L x 30% tax + 4% cess)
Tax saving at 20% bracket	Rs 31,200 (Rs 1.5L x 20% tax + 4% cess)
Tax saving at 5% bracket	Rs 7,800 (Rs 1.5L x 5% tax + 4% cess)

Additional deduction available: Rs 50,000 extra under Section 124 for NPS contribution — over and above the Rs 1.5L limit. This is in old regime only. See our dedicated NPS article for full details.

All 123 Options — Master Comparison Table

Every eligible instrument and expenditure under Section 123, compared across the factors that matter most for decision-making.

Instrument	Max Deduction	Lock-in Period	Returns (Approx)	Risk	Best For
ELSS Mutual Funds	Up to Rs 1.5L	3 years — shortest among all 123 options	12-15% historical (market-linked)	High	Investors wanting market-linked growth + tax saving
Public Provident Fund (PPF)	Up to Rs 1.5L	15 years (partial withdrawal from year 7)	7.1% per year (government-set rate)	Nil — government backed	Conservative investors, long-term wealth building
Employee Provident Fund (EPF)	Employee contribution	Until retirement (early withdrawal allowed with conditions)	8.25% per year (FY 2024-25 rate)	Nil — government backed	Salaried employees — automatic via salary
Life Insurance Premium (LIC/others)	Up to 10% of sum assured	Policy term — usually 10-20 years	4-6% (traditional plans)	Low	Only if genuinely need life insurance — not ideal as investment
National Savings Certificate (NSC)	Up to Rs 1.5L	5 years	7.7% per year (current rate)	Nil — post office backed	Conservative investors wanting guaranteed returns
5-Year Tax Saving FD	Up to Rs 1.5L	5 years — no premature withdrawal	6.5-7.25% (varies by bank)	Low	Simple, no-effort tax saving with guaranteed returns
Home Loan Principal Repayment	Up to Rs 1.5L (within 123 limit)	Property not to be sold within 5 years of possession	Not an investment — reduces debt	Nil	Existing home loan holders — passive 123 benefit
Tuition Fees (up to 2 children)	Actual fees paid	None — annual expenditure	Not an investment	Nil	Parents paying school tuition fees
Sukanya Samriddhi Yojana (SSY)	Up to Rs 1.5L	Until girl child turns 21 (partial at 18)	8.2% per year (current rate)	Nil — government backed	Parents of girl child below 10 years of age
Senior Citizen Savings Scheme (SCSS)	Up to Rs 30L (within 123 limit)	5 years	8.2% per year (current rate)	Nil — government backed	Senior citizens aged 60+ seeking highest guaranteed return

Top 5 Options Explained

Option 1 — ELSS: Best for Growth + Tax Saving

Equity Linked Savings Schemes (ELSS) are the only mutual fund category that qualifies for Section 123 deduction. They invest at least 65% in equity and have a 3-year lock-in — the shortest among all 123 instruments.

Feature	Details
Section	123 of Income Tax Act
Lock-in	3 years from each investment date (each SIP instalment has its own 3-year lock-in)
Returns	Market-linked — historically 12-15% CAGR over long periods. Not guaranteed.
Tax on returns	LTCG at 12.5% on gains above Rs 1.25 lakh per year (Section 198)
Minimum investment	As low as Rs 500 per month via SIP
Who should choose	Investors comfortable with equity market volatility, 5+ year horizon

For the complete guide to best ELSS funds in 2026 with verified return data, see our Mutual Funds Hub: Best ELSS Mutual Funds 2026

Option 2 — PPF: Best for Safety + Long-Term

Public Provident Fund (PPF) is a government-backed savings scheme with Exempt-Exempt-Exempt (EEE) tax status — investment qualifies for 123, interest is tax-free, and maturity amount is tax-free. Current interest rate: 7.1% per year, compounded annually, set by the government quarterly.

Feature	Details
Lock-in	15 years. Partial withdrawal allowed from year 7 onwards.
Annual limit	Rs 500 minimum, Rs 1,50,000 maximum per year
Interest rate	7.1% per year (current). Reviewed quarterly by government.
Tax on interest	Fully tax-free (EEE status)
Extension	Can be extended in 5-year blocks after 15 years
Who should choose	Conservative investors seeking guaranteed, tax-free returns for long-term goals

Option 3 — EPF: Automatic for Salaried

Employee Provident Fund (EPF) contributions are automatically deducted from salary for most salaried employees. Both employee and employer contribute 12% of basic salary each. Only the employee contribution qualifies for 123 deduction. Current interest rate: 8.25% per year for FY 2024-25.

EPF is effectively a forced saving — you do not need to do anything extra. Most salaried employees already max out a significant portion of their 123 limit through EPF alone. Check your salary slip to see how much EPF is being deducted monthly.

Option 4 — NSC: Simple 5-Year Government Savings

National Savings Certificate (NSC) is a post office savings instrument with a 5-year lock-in and a guaranteed interest rate of 7.7% per year (compounded annually but paid at maturity). NSC interest accrued each year is also eligible for 123 deduction (as it is deemed reinvested), except the interest in the final year. NSC is simple, safe, and backed by the Government of India.

Option 5 — Life Insurance: Only if You Need Insurance

Life insurance premium paid for self, spouse, or children qualifies for 123. The deduction is limited to 10% of the sum assured (for policies issued on or after April 1, 2013). Traditional endowment and money-back policies typically return 4-6%, which is below inflation.

The right reason to buy life insurance is protection — to ensure your family is financially secure if something happens to you. If you are buying LIC solely to save tax under 123, you are likely getting poor returns. Consider ELSS or PPF for tax saving, and buy a pure term insurance plan separately for protection.

Frequently Asked Questions (FAQs)

Conclusion

Section 123 gives you Rs 1,50,000 of tax-deductible space every year — but only in the old tax regime. The smartest way to use it:

• Step 1: Check your EPF contribution on your salary slip — this already fills a portion of your 123.
• Step 2: If you have children’s tuition fees or home loan principal — add those.
• Step 3: For the remaining limit: choose ELSS for growth, PPF for safety, or NSC for guaranteed returns.
• Step 4: Invest early in the financial year (April to June) — not in a last-minute rush in March.

Before planning 123 investments, always compare the two regimes first — in many cases the new regime saves more tax even without any deductions. See our: New Tax Regime Vs Old Tax Regime 2026

For more tax-saving options beyond 123, read: How to Save Income Tax India 2026: 15 Legal Ways

Mutual Funds India 2026: Complete Beginner’s Guide 

Income Tax India 2026 : A Complete Guide

Author

CA Ajay Khandelwal is a Chartered Accountant and financial expert with over 21 years of experience in taxation, compliance, and business advisory. As a key expert at AspirixWriters, he provides practical insights on income tax, financial planning, and regulatory matters, helping readers make informed financial decisions.

Author profile CA. Ajay Khandelwal

Disclaimer

This article is for educational and informational purposes only. It is not personal tax advice. Section 123 rules, eligible instruments, and limits are based on the Income Tax Act 2025 and incometaxindia.gov.in. Interest rates for PPF, NSC, SCSS, and SSY change quarterly — verify current rates before investing. Please consult your Chartered Accountant for personalised tax planning.

References

• Income Tax Department — Deductions allowable to taxpayer | Section 123 limit Rs 1,50,000 | LIC premium 10% condition | Home loan principal | Tuition fees eligibility — https://incometaxindia.gov.in
• Income Tax Act 2025 (Act 30 of 2025), egazette.gov.in | Chapter VI-A deductions | Sections 123 to 154 | ELSS eligibility under 123 — https://egazette.gov.in
• Income Tax Department — FAQs on New Tax vs Old Tax Regime | 123 not available in new regime | Only 124/125/146 allowed in new regime — https://www.incometax.gov.in/iec/foportal/help/new-tax-vs-old-tax-regime-faqs
• AMFI India — ELSS category definition | 3-year lock-in | Equity mutual funds qualifying for Section 123 | amfiindia.com — https://amfiindia.com
• EPFO — EPF scheme details | 8.25% interest rate FY 2024-25 | Employee contribution 12% of basic salary | epfindia.gov.in — https://www.epfindia.gov.in