Term Insurance Premium Tax Deduction Under Section 123 of the Income Tax Act, 2025
Understanding the Shift from Section 80C to Section 123
A significant point of confusion persists among assessees who continue searching for tax deductions on life insurance premiums under Section 80C of the Income Tax Act, 1961. The legal landscape has changed. With the Income Tax Act, 2025 coming into force on 1 April 2026, the relevant provision governing deductions for life insurance premiums — including term insurance — is now Section 123, read with Schedule XV of the Income Tax Act, 2025.
Section 123 is, in essence, the renumbered and restructured successor to the erstwhile Section 80C of the Income Tax Act, 1961. The core substance of the benefit has largely been preserved, but the applicable provision, the associated schedule, and the cross-references have all changed. Assessees who remain anchored to the old numbering may find themselves uncertain about what is claimable, how much can be claimed, and under what conditions — making it essential to understand the current legal framework before planning.
What Section 123 of the Income Tax Act, 2025 Actually Permits
Eligible Assessees and Qualifying Policies
Under Section 123 of the Income Tax Act, 2025, read with Schedule XV, an individual or a Hindu Undivided Family (HUF) is entitled to claim a deduction in respect of premiums paid toward a life insurance policy. The policy must be taken on the life of:
- The assessee themselves
- The assessee's spouse
- The assessee's children (whether dependent or independent, minor or major)
Important: The deduction does not extend to premiums paid for parents, siblings, in-laws, or any other relatives. This boundary is clearly drawn under the Schedule XV framework and should be factored into any insurance-linked tax planning.
This means that if Mr. Sharma pays the premium on a term plan taken on his wife's or daughter's life, the payment can still qualify for the deduction — provided the other conditions under Section 123 and Schedule XV are satisfied.
The Overall Deduction Ceiling
The aggregate ceiling for deductions under Section 123 remains ₹1,50,000 per financial year. This limit is not exclusive to life insurance premiums. It is a combined ceiling shared across all eligible payments listed in Schedule XV, which include, among others:
- Contributions to Provident Fund (PF) and Public Provident Fund (PPF)
- Equity Linked Savings Scheme (ELSS) investments
- Tuition fees for children's education
- Repayment of principal on home loans
- Life insurance premiums (including term insurance)
- National Savings Certificates and other specified instruments
For an assessee like Mr. Sharma, who already exhausts a large portion of the ₹1,50,000 ceiling through PF contributions and home loan principal repayments, the remaining headroom available for claiming term insurance premium deductions may be limited. Planning the allocation across these categories is therefore critical to optimising the available tax benefit.