Section 123 vs 80C: Life Insurance Tax Rules 2026

Quick answer: From 1 April 2026, the deduction you used to claim on life insurance premiums under Section 80C sits in Section 123 of the Income Tax Act, 2025. The Rs 1.5 lakh combined ceiling, the 10%-of-sum-assured condition and the old-regime-only restriction all carry over unchanged — what changed is the section number and the fact that eligible items now live in a schedule called Schedule XV. Separately, the maturity exemption you knew as Section 10(10D) is now Schedule II, Clause 2.

What actually changed on 1 April 2026

The Income Tax Act, 2025 replaced the Income Tax Act, 1961 and came into force on 1 April 2026, applying from tax year 2026-27. It is best understood as a re-drafting exercise rather than a policy overhaul: the government renumbered and reorganised provisions to make the statute easier to navigate, and in most cases the substance of the benefit was retained.

For life insurance buyers, three renumberings matter:

• Section 80C is now Section 123. Life insurance premiums, PPF, EPF, ELSS, NSC, tax-saver FDs, Sukanya Samriddhi, home loan principal, stamp duty and tuition fees are all still eligible, now listed together under Schedule XV.
• Section 80D is now Section 126. That is the health insurance premium deduction, which we cover separately in our guide to Section 80D becoming Section 126.
• Section 10(10D) is now Schedule II, Clause 2. This is the provision that decides whether your maturity payout is tax-free.

One practical point that trips people up: this does not apply to the return you are filing right now. Returns for FY 2025-26 are still filed under the 1961 Act, so you will still see "80C" on your Form 16 and in the ITR utility for that year. The Section 123 numbering becomes relevant from tax year 2026-27 onwards.

How much life insurance premium is actually deductible

Section 123 allows individuals and Hindu Undivided Families a deduction of up to Rs 1,50,000 per tax year. This is an aggregate ceiling across every eligible item, not a separate allowance for each. If you pay Rs 80,000 into EPF, Rs 50,000 into PPF and Rs 30,000 as a term insurance premium, your total of Rs 1,60,000 still yields a deduction of only Rs 1,50,000.

Premiums qualify when paid for yourself, your spouse or your children. Note that premiums paid for parents are not eligible here — that is a common confusion with the health insurance deduction, which does allow a separate limit for parents.

The 10% of sum assured rule

This is the condition most people overlook. For policies issued on or after 1 April 2012, the annual premium eligible for deduction is capped at 10% of the sum assured. Anything above that is simply not deductible.

An example: a policy with a sum assured of Rs 5,00,000 and an annual premium of Rs 70,000. Ten per cent of the sum assured is Rs 50,000, so only Rs 50,000 enters your Section 123 calculation. The remaining Rs 20,000 gives you no tax relief.

There is a relaxation. For policies issued on or after 1 April 2013 covering a person with a disability as described under the erstwhile Section 80U, or a person with an ailment specified under the erstwhile Section 80DDB, the limit is 15% of the sum assured instead of 10%.

In practice this rule almost never bites on pure term insurance, where cover is large and premiums are small. It bites hardest on endowment, money-back and traditional savings-linked plans, where premiums are high relative to the sum assured. If you are comparing plans, the ratio is worth checking before you buy, not at filing time.

The regime question: does the deduction still exist for you?

Section 123 is a deduction available under the old tax regime. The new regime is the default under Section 202 of the Income Tax Act, 2025, and if you remain in it you cannot claim Section 123 at all. This is not new — it mirrors how 80C worked under the concessional regime — but it is the single biggest reason many salaried taxpayers now get no tax benefit from their insurance premium.

What that means for buying decisions is straightforward and worth saying plainly: if you are in the new regime, the tax deduction is not a reason to buy a life insurance policy. Buy cover because your family needs an income replacement if you die, and choose the amount and term on that basis. Any tax saving is a side effect, not the product.

Will your payout be tax-free? Schedule II, Clause 2 in plain terms

The exemption on money you receive from a life insurance policy was Section 10(10D) and is now Schedule II, Clause 2. The premium thresholds introduced in the 2021 and 2023 Budgets continue to apply. In summary:

• Death benefit: fully exempt in the hands of the nominee, regardless of the premium-to-sum-assured ratio. This is the point of term insurance and it is untouched.
• General condition: maturity proceeds are exempt if the annual premium does not exceed 10% of the sum assured (15% in the disability and specified-illness cases above).
• ULIPs: for policies issued on or after 1 February 2021, proceeds are exempt only if the aggregate annual premium across all your ULIPs stays within Rs 2.5 lakh in a tax year.
• Non-ULIP policies: for policies issued on or after 1 April 2023, proceeds are exempt only if the aggregate annual premium stays within Rs 5 lakh.

Cross the ULIP or non-ULIP threshold and the excess policies lose the exemption — which is why high-ticket savings policies now need a tax check before purchase, not after.

Don't forget: your premium itself got cheaper

Since 22 September 2025, following the 56th GST Council meeting held on 3 September 2025, individual life insurance premiums are exempt from GST. Term plans, endowment policies and ULIPs bought by individuals no longer carry the earlier 18% GST. Group and employer-provided policies continue to attract GST.

So the amount you actually pay — and therefore the amount you claim under Section 123 — is lower than it would have been before September 2025. And if your renewal notice still shows a higher total than last year, the increase is a base-rate revision by the insurer, not tax. Ask for the pre-tax base premium for both years to see what really moved.

A short checklist before you claim

• Confirm which regime you are in. No old regime, no Section 123 deduction.
• Check your premium against 10% of the sum assured for each policy issued after 1 April 2012.
• Add up all Schedule XV items first — EPF alone often uses a large part of the Rs 1.5 lakh.
• Keep premium payment receipts and the policy schedule showing the sum assured.
• For savings-linked plans, check the aggregate Rs 2.5 lakh (ULIP) and Rs 5 lakh (non-ULIP) thresholds across all your policies.
• Remember premiums for parents do not qualify under this section.

Frequently asked questions

Is Section 123 the same as Section 80C?

In substance, yes. Section 123 of the Income Tax Act, 2025 is the renumbered successor to Section 80C of the 1961 Act, with the same Rs 1.5 lakh limit and largely the same list of eligible investments, now set out in Schedule XV.

Can I claim the deduction under the new tax regime?

No. Section 123 is available only if you opt for the old regime. The new regime is the default under Section 202.

Does term insurance premium qualify?

Yes, subject to the 10%-of-sum-assured cap. Because term plans offer a very large sum assured for a small premium, the cap is rarely a constraint for them.

Is the death benefit from a term plan taxable?

No. The amount paid to a nominee on the death of the life assured remains fully exempt, even where the premium exceeded the prescribed percentage of the sum assured.

Where should I verify the final position?

Because the Act is newly in force and ITR forms, utilities and departmental FAQs are still being aligned to the new numbering, check the Income Tax Department's official portal at incometax.gov.in for the version applicable to your filing year, and speak to a qualified tax adviser for your own situation.

Sources

This article draws on the Income Tax Act, 2025 provisions as summarised by ClearTax (Section 123 and Schedule XV; Section 10(10D) and life insurance taxability), the Ministry of Finance Department of Financial Services notification on the exemption of GST on all individual life and health insurance policies, and the GST Council's press release on the recommendations of its 56th meeting held on 3 September 2025. Tax rules change and individual circumstances differ — verify current provisions at incometax.gov.in before acting.

NewEdgePolicy is an independent insurance education publisher. We do not sell policies and this is general information, not tax or financial advice. See our editorial and trust page, our term life insurance section, and our insurance glossary for definitions used above.