Direct and Indirect Taxation · Deductions, Rebate and Relief

Deductions for Savings, Investments and Payments under Income-tax Act 2025

Updated 10 October 2026 · Fact-checked

Deductions for savings and investments reduce gross total income when you pay into specified items such as life insurance, provident fund, pension schemes, tuition fees or home loan repayment. Check that the payment is listed in Schedule XV, apply item limits such as the premium cap on sum assured, then watch for withdrawal rules that tax the deduction back.

Understand Deductions for Savings, Investments and Payments

A deduction is an amount you subtract from gross total income to reach total income. It is different from a rebate or relief, which reduces the tax itself after it is computed. If a question says 'deduct from gross total income', it is a deduction. If it says 'reduce the tax', it is a rebate or relief.

The Income-tax Act, 2025 lists the savings and investment payments that qualify in Schedule XV, which works with section 123. The list is long. It includes life insurance premium, deferred annuity, contributions to provident fund, recognised provident fund and approved superannuation fund, notified savings certificates, tuition fees for two children, repayment of housing loan and stamp duty on a house, five-year term deposits, Senior Citizen Savings Scheme deposits, pension scheme contributions and subscription to certain equity shares.

Most items have a who condition (you, your spouse, your child; for an HUF, any member) and a what condition (the exact kind of policy, fund or deposit). Many also need a Central Government notification. Read each item for these two conditions before you claim.

Schedule XV also protects the tax system. If you break a holding condition (terminate a policy early, sell the house or shares too soon, withdraw a deposit early), the earlier deductions are taken back and taxed as income. Some pension and annuity receipts are taxed when received because the deduction was allowed earlier.

Other deductions that students group with this topic, such as medical insurance, education loan interest and donations, have their own provisions and limits. They are not part of Schedule XV. Take their limits from your study material for the tax year, and check whether the question says the assessee is under the new regime, since availability of deductions can depend on the regime chosen.

Key rules to remember

Life insurance premium qualifying limit (policy issued on or before 31 March 2012): Qualifying premium = lower of actual premium and 20% × actual capital sum assured; Applies to policies other than a deferred annuity contract.
Life insurance premium qualifying limit (policy issued on or after 1 April 2012): Qualifying premium = lower of actual premium and 10% × actual capital sum assured; Policy issued on or after 1 April 2013 covering a person with disability or severe disability, or a specified disease or ailment, gets 15% instead.
Actual capital sum assured: Minimum amount assured under the policy on happening of the insured event at any time during the term of the policy; Ignore premiums agreed to be returned and bonus or other benefits above the sum actually assured.
Government salary deferred annuity: Deduction limited to 20% of salary; Applies to sums deducted from salary paid by or on behalf of the Government.
Pension scheme contribution by an individual: Employee: 10% of salary (including dearness allowance, if terms of employment so provide; excluding other allowances and perquisites). Any other individual: 20% of gross total income; Applies to a pension scheme notified by the Central Government.
Tuition fees: Fees only, for full-time education of any two children, at an institution in India; Development fees, donations and similar payments are excluded.
Life insurance clawback: Single premium policy: terminated within two years of commencement. Other policy: terminated or lapsed before premiums are paid for two years; Deductions allowed earlier become income of the year in which the condition is met.
ULIP clawback: Participation ended before contributions are paid for five years; Covers the Unit-Linked Insurance Plan, 1971 and the LIC Mutual Fund unit-linked plan.
House property clawback: Transfer before five years from the end of the tax year in which possession was obtained, or refund of the sum claimed; The aggregate of deductions actually allowed earlier is deemed income of the year of transfer or refund.
Shares or debentures clawback: Sale or transfer within three years of acquisition; Acquisition date is the date the name is entered in the register of members or debenture-holders.

How to solve Deductions for Savings, Investments and Payments questions

Use this order for any computation or theory question on savings and investment deductions.

1Identify the assessee: individual or HUF. This decides whose life or name qualifies (self, spouse, child; for an HUF, any member).
2List every payment in the question and match each to an item in Schedule XV. Drop items that do not fit, such as donation of development fees or admission fee for a society membership.
3Check the conditions: notified scheme, date of policy issue, term of deposit, institution in India, number of children.
4Apply the item limit. For insurance, compute 10% (or 20% or 15%) of actual capital sum assured and take the lower of that and the premium.
5Add up the qualifying amounts and apply any aggregate limit stated in the question or in your study material. Do not allow more than that limit.
6Deduct the result from gross total income, subject to any aggregate limit stated in the question.
7Check for clawback: any termination, transfer, early withdrawal or sale in the year. Add the earlier deductions to income of that year.
8Write the final answer with a short working note for each item allowed and each item rejected.

Quickest way: Three-column table method

When to use it: Use it when a question lists five or more payments and you have little time.

Draw three columns: Payment, Qualifies (Yes or No with reason), Amount allowed.
Tick Yes or No on the list first. Do not compute anything yet.
Compute limits only for items that qualify: insurance premium cap, pension percentage, two-child tuition rule.
Total the last column, apply any aggregate limit stated in the question or study material, then deduct.
Scan the question once more for a sale, lapse or withdrawal that triggers clawback.

Common mistakes in Deductions for Savings, Investments and Payments

Claiming the full premium without testing it against the sum assured limit.
Students remember that insurance premium is deductible but forget the cap in paragraph 2 of Schedule XV.
Fix: Always compute 10%, 15% or 20% of actual capital sum assured by policy date and take the lower figure.
Using bonus or returned premium to compute the capital sum assured.
The total maturity figure looks like the sum assured.
Fix: Use only the minimum amount assured on the insured event. Exclude bonus and premiums agreed to be returned.
Allowing tuition fees for a third child, or including donation and development fees.
Students read 'tuition fees' loosely.
Fix: Allow only tuition fees, for any two children, for full-time education in India.
Claiming the admission fee, share cost or initial deposit paid to a housing society as house purchase payment.
It feels like part of buying the house.
Fix: Paragraph 3 excludes these. Also exclude renovation after the completion certificate, occupation or letting, and any cost already allowed under section 22.
Forgetting to tax back earlier deductions when a policy is surrendered or a house is sold early.
Students treat deductions as permanent once allowed.
Fix: Check the holding period for each item. The aggregate deduction allowed earlier is deemed income of the tax year in which the condition is met.
Mixing up deduction with rebate or relief.
Both reduce the tax burden.
Fix: A deduction reduces income before tax is computed. A rebate or relief reduces the tax itself.

Worked examples

Example 1

Arjun took a life insurance policy on his own life on 1 June 2020. The sum assured is ₹5,00,000 and the annual premium is ₹60,000. Assume the policy is not a deferred annuity contract and has no bonus or return of premium features. How much of the premium qualifies under Schedule XV paragraph 2?

Show the solution

The policy was issued on or after 1 April 2012, so the limit is 10% of actual capital sum assured.
Limit = 10% × ₹5,00,000 = ₹50,000.
Actual premium paid is ₹60,000.
Qualifying premium is the lower of ₹60,000 and ₹50,000 = ₹50,000.
The excess ₹10,000 is not eligible.

Answer: ₹50,000 of the premium qualifies. This then goes into the total of eligible savings, subject to any aggregate limit stated in the question.

Example 2

Neha bought a house and obtained possession on 10 August 2026. Assume she is eligible to claim these deductions in the years concerned. She repaid a housing loan and claimed deductions of ₹1,20,000 in tax year 2026-27 and ₹1,30,000 in tax year 2027-28 under Schedule XV paragraph 1(r). She sold the house on 15 January 2032. What is the effect?

Show the solution

Possession was obtained in tax year 2026-27, which ends on 31 March 2027.
Five years from the end of that tax year runs to 31 March 2032.
The sale on 15 January 2032 is before that date, so the transfer condition is met.
Aggregate deductions allowed earlier = ₹1,20,000 + ₹1,30,000 = ₹2,50,000.
This amount is deemed to be Neha's income of the tax year in which the sale takes place, which is 2031-32, and is taxed in that year.

Answer: ₹2,50,000 is deemed income of tax year 2031-32. Capital gains on the sale are computed separately.

Exam tips

In MCQs, the usual traps are the 10% versus 20% policy-date rule, the two-child tuition limit and the holding periods of two, three and five years. Learn these as a small list.
In written answers, show the insurance limit working line by line (limit, premium, lower figure). Examiners award step marks for it.
Always state who the payment is for. A premium on a parent's life or a brother's child does not qualify for an individual.
When a question mentions a sale, lapse or withdrawal, check clawback before finalising the answer. This is a favourite extra step.
Keep deduction and rebate separate in layout: deductions come before total income, rebate and relief come after tax is computed.

Practice questions from Deductions, Rebate and Relief

Deductions for Savings, Investments and Payments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Deductions for Savings, Investments and Payments: frequently asked questions

What is the difference between a deduction and a rebate?

A deduction reduces gross total income, so tax is computed on a lower total income. A rebate or relief reduces the tax payable after it has been computed. Always check which stage the question is asking about.

Are all deductions in this topic available under the new tax regime?

Not necessarily. Availability depends on the regime provisions, which are separate from Schedule XV. Check the regime the question states and confirm which deductions it allows from your study material for the tax year.

What happens if I stop paying life insurance premiums after claiming a deduction?

If the policy is terminated or lapses and is not revived before premiums have been paid for two years (or within two years of commencement for a single premium policy), the deductions already allowed are deemed income of the year the condition is met.

Which tuition fees qualify for deduction?

Only tuition fees paid to a university, college, school or other educational institution in India for full-time education of any two children of the individual. Development fees, donations and similar payments do not qualify.

Where do I find limits for medical insurance, education loan interest and donations?

They are not in Schedule XV. They are governed by separate provisions of the Act, so take the limits and conditions for the tax year from your study material or the figures given in the question.