TaxSaral

Section 123 · was Section 80C in the 1961 Act

Investments & Insurance Premium (₹1.5L limit)

Deduction up to ₹1,50,000 for specified investments: EPF, PPF, ELSS, Life Insurance premiums, home loan principal, NSC, Sukanya Samriddhi, 5-year tax-saving FD, and tuition fees. Only under the optional regime.

Who it applies to: Salaried individuals and self-employed persons using the optional (old) tax regime.

Key points

  • ₹1,50,000 is the combined cap — all qualifying investments together cannot exceed this.
  • EPF (employee contribution) counts automatically — if your EPF contribution exceeds ₹1.5L, the rest does not give extra benefit.
  • ELSS mutual funds have a 3-year lock-in — shortest among all Section 123 instruments.
  • This deduction is NOT available under the default (new) tax regime.

Worked examples

1. Maximising the ₹1.5L limit

Sanjay earns ₹12L salary. His EPF (employee share) = ₹72,000. He also pays ₹60,000 LIC premium and ₹40,000 into PPF. He uses the optional regime.

EPF employee contribution: ₹72,000
LIC premium:               ₹60,000
PPF contribution:          ₹40,000
Total eligible:            ₹1,72,000

Cap under Section 123:     ₹1,50,000
Deduction allowed:         ₹1,50,000 (excess ₹22,000 gives no benefit)

Tax saving (30% slab):
  ₹1,50,000 × 30% = ₹45,000
  Plus 4% cess: ₹45,000 × 1.04 ≈ ₹46,800 saved

Result: Sanjay saves ₹46,800 in tax by utilising the full ₹1.5L deduction. The ₹22,000 excess investment (PPF) has no additional tax benefit but still builds his wealth.

2. ELSS vs PPF — same tax benefit, different lock-in

Radha wants to invest ₹50,000 purely for Section 123 benefit. Should she choose ELSS or PPF?

ELSS: Lock-in = 3 years, Market returns (historical 12-15% p.a.), Returns taxable as LTCG above ₹1.25L
PPF: Lock-in = 15 years, Fixed ~7.1% p.a., Returns fully tax-free

Both give same Section 123 deduction: ₹50,000 × 30% = ₹15,000 tax saving

Result: The Section 123 tax saving is identical for both. Choose based on risk appetite and liquidity needs: ELSS for wealth creation with shorter lock-in, PPF for guaranteed returns and complete tax-free maturity.

Related sections

Not sure how Section 123 applies to you? Ask a question or browse all sections.

Section references are based on the Income Tax Act 2025 (Tax Year 2026-27). Examples are illustrative; verify with a Chartered Accountant before filing.