Section 123 & 126 explained: this guide covers what Section 123 & 126 means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Key Highlights
- Section 123 of ITA 2025 = Section 80C of ITA 1961 (Investment deductions)
- Section 126 of ITA 2025 = Section 80D of ITA 1961 (Health insurance deductions)
- Both available under Old Tax Regime only — NOT available in New Tax Regime
- Section 123 deduction limit: ₹1,50,000 per year
- Section 126 deduction limit: ₹25,000 (self/family) + ₹25,000 (parents) — up to ₹1,00,000 total for senior citizens
- Combined Chapter VIII deductions (all 80C to 80U equivalents) in a single chapter under ITA 2025
- NPS additional deduction: Section 132 (80CCD(1B) equivalent) — ₹50,000 extra over ₹1.5 lakh limit
1. Overview
Chapter VIII of the Income Tax Act, 2025 contains all deductions from total income — the equivalents of Sections 80A to 80U of the old Act. These deductions reduce your Gross Total Income to arrive at Total Income — the figure on which tax is finally computed.
The two most popular deductions are Section 123 (80C equivalent — for investments) and Section 126 (80D equivalent — for health insurance). Together, these can save up to ₹52,500 in taxes for someone in the 30% bracket who fully utilises both.
Critical note: All these deductions are available only in the Old Tax Regime. In the New Tax Regime under Section 202, Chapter VIII deductions (except for employer's NPS contribution under Section 132) are not available.
2. Section 123: Investment Deductions (Old Section 80C)
Section 123 of ITA 2025 allows a deduction of up to ₹1,50,000 per year for specified investments and payments. This is available to individuals and HUFs under the Old Tax Regime.
Eligible Investments Under Section 123:
| Investment / Payment | Lock-in Period | Key Features |
|---|---|---|
| Public Provident Fund (PPF) | 15 years | Tax-free interest; EEE status |
| Employee Provident Fund (EPF) — employee's share | Until retirement | Employer's share also exempt up to limits |
| Life Insurance Premium (self, spouse, children) | Policy period | Premium must not exceed 10% of sum assured |
| ELSS (Equity-Linked Saving Scheme) Mutual Funds | 3 years (shortest) | Best potential returns; market-linked |
| National Savings Certificate (NSC) | 5 years | Interest earned also qualifies under 80C |
| 5-Year Bank/Post Office Fixed Deposit | 5 years | Fixed return; low risk |
| Sukanya Samriddhi Yojana (for girl child) | 21 years / marriage | Highest interest among small savings; EEE |
| Senior Citizen Savings Scheme (SCSS) | 5 years | Quarterly interest; for age 60+ |
| Home Loan Principal Repayment | Until loan closure | Only if property not sold within 5 years |
| Tuition Fees (children) | N/A (annual) | Only tuition fees; not development fees, transport |
| NPS (employee's own contribution) | Until age 60 | Additional deduction under Section 125 |
Maximum combined deduction under Section 123: ₹1,50,000 per year
3. Section 125: NPS Additional Deduction (Old Section 80CCD)
Section 125 of ITA 2025 provides for NPS deductions:
- Section 125(1): Employee's own NPS contribution up to 10% of salary — within the ₹1.5 lakh Section 123 limit
- Section 125(1B) : An extra ₹50,000 beyond the ₹1.5 lakh limit for own contribution to NPS (Tier 1 account)
- Section 132 : Employer's contribution to NPS up to 10% of salary (14% for government employees) — available in both old AND new regime
This means a salaried NPS subscriber can claim up to ₹2,00,000 in NPS-related deductions (₹1,50,000 under Section 123 + ₹50,000 extra under Section 125) under the old regime.
4. Section 126: Health Insurance Deduction (Old Section 80D)
Section 126 of ITA 2025 provides deductions for health insurance premiums. This is available under the Old Tax Regime only.
| Who is Covered | Maximum Deduction | Additional for Senior Citizen |
|---|---|---|
| Self, spouse, children | ₹25,000 | ₹50,000 if any of them is a senior citizen |
| Parents | ₹25,000 | ₹50,000 if parents are senior citizens |
| Maximum if all non-senior citizens | ₹50,000 (₹25K self + ₹25K parents) | — |
| Maximum if self/family is senior citizen | ₹75,000 (₹50K self + ₹25K parents) | — |
| Maximum if both self and parents are senior citizens | ₹1,00,000 (₹50K + ₹50K) | — |
Preventive health check-up: Within the above limits, ₹5,000 can be claimed for preventive health check-up expenses even without insurance premium.
Cash payments: Health insurance premiums paid in cash are NOT eligible for Section 126 deduction — must be paid via non-cash mode.
5. Other Key Deductions Under Chapter VIII of ITA 2025
| Section (ITA 2025) | Old Section | Description | Max Deduction |
|---|---|---|---|
| 127 | 80DD | Medical treatment / maintenance of disabled dependent | ₹75,000 (severe: ₹1,25,000) |
| 128 | 80DDB | Treatment of specified diseases (cancer, renal failure etc.) | ₹40,000 (₹1L for senior citizen) |
| 130 | 80E | Interest on education loan (for higher education) | Actual interest — no cap; 8 years |
| 131 | 80EEA | Interest on housing loan (affordable housing) | ₹1,50,000 extra over Section 24(b) |
| 133 | 80G | Donations to approved charitable institutions | 50% or 100% of donation; 10% GTI cap |
| 134 | 80GGA | Donations for scientific research / rural development | 100% deduction |
| 135 | 80GGC | Donations to political parties | 100%; cash not allowed |
| 136 | 80IA | Profits from infrastructure development | 100% of profits for specified years |
| 138 | 80-IAC | Startup profit deduction (DPIIT-recognized startups) | 100% for 3 out of 10 years |
| 145 | 80P | Income of co-operative societies | Specified amounts |
| 152 | 80TTA | Interest on savings account (non-senior) | ₹10,000 |
| 153 | 80TTB | Interest income for senior citizens (FD + savings) | ₹50,000 |
| 154 | 80U | Deduction for individual with disability | ₹75,000 (severe: ₹1,25,000) |
6. Maximum Possible Deduction Under Old Regime
Illustrative example — not all deductions may be available to every taxpayer.
- Section 123 (80C): ₹1,50,000
- Section 125 NPS extra: ₹50,000
- Section 126 (80D) self + parents (seniors): ₹1,00,000
- Section 24b (Home loan interest): ₹2,00,000
- Section 130 (80E) Education loan interest: Unlimited
- Section 133 (80G) Donations: Varies
- Standard Deduction (Section 16): ₹50,000 (old regime)
- Total (conservative): ₹5,50,000+
7. Latest Updates Under ITA 2025
- All old 80-series deductions reorganised and renumbered under Chapter VIII of ITA 2025
- Substance and limits unchanged — Section 123 = ₹1.5L, Section 126 = ₹25K/50K
- All Chapter VIII deductions: Old Regime only (except Section 132 — employer NPS)
- Senior citizen definition: 60 years and above
8. Why TaxClue
Maximising Chapter VIII deductions requires careful planning — knowing which investments to make, how much to invest, and which regime gives better tax savings. TaxClue's experts create a complete tax saving plan for you — balancing liquidity, returns, and tax efficiency. Contact us for year-round tax planning and ITR filing under ITA 2025.
9. Resources & Checklist
- ☐ Invest up to ₹1.5 lakh in Section 123 options (PPF, ELSS, LIC, EPF etc.)
- ☐ Pay health insurance premium — claim Section 126 for self and parents
- ☐ Open NPS Tier 1 account for additional ₹50,000 Section 125 deduction
- ☐ Keep all payment receipts and investment proofs
- ☐ Submit investment declaration in Form 12BB to employer
- ☐ Provide actual proofs to employer by January–February
10. Contact Us
Tax-saving deductions under Chapter VIII of the Income Tax Act, 2025 can save you ₹50,000 to ₹1,50,000+ in taxes — but only if you know which ones to claim and how. Contact us for personalised tax planning and ITR filing support.