How Much Tax Can be Saved Under Sections 123, 126, and 133?

Income tax in India is a direct, progressive tax levied on income earned by individuals, associations, and organisations, as per the Income Tax Act, 2025. It is a key revenue source for the government, funding essential public services and infrastructure. Tax is levied based on various income categories, with rates increasing for higher income brackets. Taxpayers can reduce their liability through deductions and exemptions available under the old tax regime, such as under Section 123, Section 126, and Section 133 of the Income Tax Act, 2025. 

Section 123 Overview

Section 123 of the Income Tax Act is a tax-saving provision that allows individuals to deduct certain specified investments and expenses from their taxable income. In a fiscal year, the maximum deduction under Section 123 is limited to Rs.1.5 Lakh.

Deductions and Tax Saving Under Section 123

Section 123 of the Indian Income Tax Act, 2025, enables taxpayers to deduct certain predefined investments and expenses from their taxable income. Under Section 123, taxpayers are eligible to deduct up to Rs.1.5 Lakh from their taxes each fiscal year. Section 123 also allows for a deduction for payments made toward the principal amount of Home Loan EMIs.

Taxpayers can lessen their taxable income and subsequently their tax obligation by making investments in and incurring expenses for eligible items. According to Section 123, the following investments and costs are typical examples of deductions. 

Contributions to Employees' Provident Fund (EPF)

The Employees' Provident Fund (EPF), an Indian retirement savings program, is in charge of managing the fund. Employees in the organised sector are required to make a set monthly contribution to the EPF from their take-home salary. Employers must also contribute a matched contribution. The EPF was created to provide workers with security during their retirement years. Employees may withdraw accumulated contributions and interest upon retirement or in other circumstances. Because withdrawals are tax-free, the EPF is an appealing investment option for tax-saving purposes.

Life Insurance Premiums

Life insurance premiums are payments made to purchase a life insurance policy. A life insurance policy is a contract between the policyholder and the insurance company in which the insurance company agrees to pay a death benefit to the policy's beneficiaries in the event of the policyholder's death. Life insurance premiums are deductible in India under Section 123 of the Income Tax Act, 2025.

Equity-Linked Savings Scheme (ELSS) investments

In India, an equity-linked savings scheme (ELSS) is a type of mutual fund investment that provides tax benefits to taxpayers under Section 123 of the Income Tax Act, 2025. ELSS funds are a type of equity mutual fund that invests primarily in equities. ELSS funds invest in a diverse portfolio of equity securities, intending to provide long-term capital growth.

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a long-term savings plan. It is intended to encourage individual savings while also providing a safe investment option with attractive returns. Individuals can open a PPF account with a bank or post office and contribute up to Rs.1.5 Lakh per fiscal year. The contributions are deductible under Section 123 of the Income Tax Act, 2025.

National Savings Certificate (NSC)

The National Savings Certificate (NSC) is a savings certificate issued by the government of India to encourage individual savings. The NSC is a fixed-income investment, which means it pays a fixed rate of interest for the duration of the investment. The interest earned on NSC is reinvested, and the principal and accumulated interest are paid back at the end of the investment term. Investments in NSC are deductible under Section 123 of the Income Tax Act, 2025.

Subsections of Section 123

Section 123 

Individual contributions to pension plans in India are tax-deductible under Section 123 of the Income Tax Act, 2025. Individuals can deduct contributions to pension plans offered by life insurance companies, banks, or any other approved institution under this section. The maximum deduction under this section in a fiscal year is Rs.1.5 Lakh, which is the same as the limit under Section 123. The goal of Section 123 is to encourage people to save for retirement and to provide a steady source of income in their post-retirement years. 

Section 124 

Individual contributions to India's National Pension System (NPS) are tax-deductible under Section 124 of the Income Tax Act, 2025. Under Section 124, individuals can deduct up to 10% of their basic salary (for salaried individuals) or gross total income (for self-employed individuals) for NPS contributions. Individuals can claim an additional deduction of up to Rs.50,000 under Section 124(3) & (4) for NPS contributions made in addition to the 124 deduction. 

Section 126 Overview

Section 126 of the Income Tax Act, 2025, of India provides tax breaks for citizens who pay for medical insurance premiums for themselves, their spouses, dependent children, and their parents. Individual taxpayers can claim a maximum deduction of Rs.75,000 while senior citizens can claim a maximum deduction of Rs.1,50,000. The maximum deduction increases to Rs.50,000 if the parents are senior citizens. 

What are the Deductions Under Section 126?

Under Section 126 of the Income Tax Act, 2025, individuals can claim tax benefits on medical insurance premiums paid for themselves and their family members, subject to specified limits. The deduction amount varies based on the age of the insured and the type of policy chosen. For individuals below 60 years of age, the maximum deduction allowed is Rs.25,000 per financial year. Senior citizens, aged 60 years and above, can claim a higher deduction of up to Rs.50,000 per financial year. 

In addition, individuals can claim a separate deduction for premiums paid towards their parents’ health insurance. If the parents are below 60 years, an additional deduction of up to Rs.25,000 is available. This limit increases to Rs.50,000 if the parents qualify as senior citizens. However, the overall deduction under Section 126 is subject to the applicable limits based on age and policy type. It is also important to note that premiums paid in cash are not eligible for tax benefits under this section. 

Various types of health insurance policies are eligible under Section 126, such as: 

• Mediclaim policies – Cover hospitalisation expenses such as room charges, doctor’s fees, and medicines  
• Critical illness policies – Provide financial support for specified serious illnesses  
• Senior citizen health insurance plans – Designed to address the medical needs of older individuals  
• Family floater policies – Offer coverage for multiple family members under a single plan 

By availing of a Home Loan, you not only realise your dream of owning a home but also avail of tax benefits. You can use our Income Tax Calculator to calculate tax savings before and after availing of a Home Loan. 

Section 133 Overview 

Section 133 of the Income Tax Act, 2025, allows for tax deductions for charitable contributions made to specific institutions and organisations. Donations eligible for deductions under this section must be made in specified forms, such as cash, check, demand draft, or electronically. 

Depending on the nature of the institution and the type of donation made, the deduction available under Section 133 ranges from 50% to 100% of the donation amount. Donations to a notified charitable trust or institution, for example, are eligible for a 100% deduction, whereas donations to political parties are eligible for a 50% deduction. 

It should be noted that the contribution must be made to a recognised and eligible institution or organisation, and a receipt must be obtained. The receipt must be kept for record-keeping purposes and must be produced if required. 

Conclusion

Taxpayers should keep detailed records of their investments and expenses, as well as appropriate proof and documentation, to claim deductions under Sections 123, 126, 133. Taxpayers can effectively reduce their tax liability while also investing in their future financial security by claiming these deductions.