Tax Laws and Practice · Deductions

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

Updated 11 October 2026 · Fact-checked

Deductions for savings and payments reduce your total income when you pay specified amounts, such as life insurance premium, provident fund contribution, tuition fees or home loan principal. Schedule XV lists the qualifying sums for section 123. To solve a question, match the payment to the clause, apply its cap, then check the withdrawal and disallowance rules.

Understand Deductions for Savings, Investments and Payments

A deduction is an amount you subtract from your income before tax is computed. It is not an exemption. The income is still earned, but the law lets you reduce it because you saved or spent in a way the law wants to encourage.

Under the Income-tax Act, 2025, the list of qualifying savings and payments sits in Schedule XV, which is read with section 123. It covers life insurance premium, annuity plans, provident fund and recognised provident fund contributions, approved superannuation fund, notified savings schemes, ULIPs, notified mutual fund units, pension schemes, tuition fees, housing loan repayment and purchase or construction payments, five-year term deposits, the Senior Citizen Savings Scheme, Post Office Time Deposit and eligible equity subscriptions.

Each clause has its own conditions. Who is covered matters. For life insurance, an individual can claim for self, spouse and any child. A Hindu undivided family can claim for any member. Tuition fees cover only two children and only tuition, not development fees or donations.

The Schedule also contains a reverse side. If you break the conditions, for example by stopping premiums early or selling a house within five years, the deductions already allowed are taxed as income in that year. If you withdraw early from certain deposits or pension schemes, the receipt is taxed. Examiners love this reverse side.

Donations, medical insurance premium and education loan interest are also deductions, but they follow their own rules and limits, which are not in Schedule XV. Learn the limits for those from the ICSI study material and the Act itself. Keep them separate in your mind: Schedule XV deductions reward saving or investing, while donation deductions reward giving away money to approved bodies.

Key rules to remember

Life insurance premium cap, policy issued on or before 31 March 2012: Qualifying premium = lower of (premium paid, 20% × actual capital sum assured); Schedule XV, paragraph 2(1)(a). Applies to the premium on policies other than deferred annuity contracts.
Life insurance premium cap, policy issued on or after 1 April 2012: Qualifying premium = lower of (premium paid, 10% × actual capital sum assured); Paragraph 2(1)(b). This is the general cap for newer policies.
Cap for disability or specified disease policy issued on or after 1 April 2013: Qualifying premium = lower of (premium paid, 15% × actual capital sum assured); Paragraph 2(1)(c). Applies where the policy covers a person with disability or severe disability, or a person with a specified disease or ailment.
Actual capital sum assured: Minimum amount assured on the insured event during the term, ignoring premiums agreed to be returned and bonus; Paragraph 2(2). Do not add bonus or returnable premium to the sum assured.
Pension scheme contribution by an individual: Employee: up to 10% of salary (including dearness allowance, if terms of employment so provide, but excluding other allowances and perquisites). Any other individual: up to 20% of gross total income; Paragraph 1(y). The scheme must be notified by the Central Government.
Tuition fees: Tuition fees only, for full-time education of any two children, in India; Paragraph 1(q). Exclude development fees, donations and similar payments.
Life insurance recovery trigger: Deductions allowed so far become income if the policy ends before premiums are paid for 2 years (single premium policy: within 2 years of commencement); Paragraph 4, Table item 1. Applies on termination by notice or on lapse that is not revived.
ULIP recovery trigger: Deductions allowed so far become income if participation ends before contributions are paid for 5 years; Paragraph 4, Table item 2.
House property recovery trigger: Deductions become income if the property is transferred before 5 years from the end of the tax year in which possession is obtained, or if the sum is received back; Paragraph 4, Table item 3.
Equity or debenture recovery trigger: Deductions become income if the shares or debentures are sold or transferred within 3 years of acquisition; Paragraph 4, Table item 4. Acquisition date is the date the name is entered in the register.
Early withdrawal from SCSS or 5-year Post Office Time Deposit: Amount withdrawn before 5 years from the date of deposit is income of the year of withdrawal; Paragraph 5, Table item 1. Interest already taxed earlier and amounts received by a nominee or legal heir on death (other than untaxed accrued interest) are excluded.

How to solve Deductions for Savings, Investments and Payments questions

Use this order for any question on savings, investment or payment deductions. It stops you from missing a cap or a recovery rule.

1Identify who is claiming: an individual or a Hindu undivided family. This decides whose life, spouse or children are covered.
2List each payment and match it to the clause of Schedule XV. Drop items that do not qualify, such as development fees, donations to a school, or repairs after the completion certificate.
3Check the condition for each payment: notified scheme, two children only, scheme period of five years, and so on.
4For life insurance, find the policy issue date and compute the cap on the actual capital sum assured. Take the lower of premium paid and the cap.
5For pension scheme contributions, apply the 10% of salary or 20% of gross total income limit depending on whether the person is an employee or another individual.
6Add the qualifying amounts and apply any overall ceiling stated in section 123 and the study material. Do not exceed that ceiling.
7Check the reverse rules: early termination, transfer of property, early withdrawal. If triggered, state the amount deemed to be income and the year it is taxed.
8Write the conclusion with the provision cited: qualifying deduction, the amount, and any taxable recovery.

Quickest way: Four-line check for premium and recovery questions

When to use it: Use when the question gives a policy or scheme with dates and asks for the deduction or for the tax effect of stopping or selling.

Write the date of the policy and the capital sum assured. Pick 20%, 10% or 15% from the date and the type of insured person.
Compute the cap, then take the lower of premium and cap.
Look for a stop, sale or withdrawal. Compare the holding period with 2 years (life insurance), 5 years (ULIP, house, SCSS, post office deposit) or 3 years (eligible shares).
If the period is not met, add back all deductions allowed earlier as income of the year of the event, and say so in one sentence.

Common mistakes in Deductions for Savings, Investments and Payments

Adding bonus or returnable premium to the sum assured before applying the percentage cap.
Students read the maturity value on the policy instead of the minimum amount assured.
Fix: Use only the minimum amount assured on the insured event. The definition of actual capital sum assured excludes bonus and premiums agreed to be returned.
Using the 10% cap for every policy.
10% is the most common cap, so students apply it without checking the policy date.
Fix: Check the issue date. On or before 31 March 2012 it is 20%. From 1 April 2013 for a person with disability or a specified disease it is 15%.
Allowing development fees or donations as tuition fees.
Students treat every school payment as education expense.
Fix: Only tuition fees qualify, for full-time education of any two children at an institution in India.
Treating the recovery of deductions as a penalty on the current year's deduction only.
Students forget that the deduction is withdrawn for earlier years as well.
Fix: The aggregate of deductions allowed in earlier years becomes income of the year of the event, and no deduction is allowed for that year.
Including cost of share, admission fee or later renovation in the housing payment deduction.
Students count every payment connected with the house.
Fix: Stamp duty, registration fee and transfer expenses are included. Share cost, admission fee and initial deposit are excluded, as are additions, repairs and renovation after the completion certificate or after occupation or letting.
Mixing savings deductions with donations or medical insurance deductions.
All are called deductions and appear in the same chapter.
Fix: Treat Schedule XV payments as one group with their own conditions. Check the separate rules and limits for donations, medical insurance and education loan interest, and state each under its own provision.

Worked examples

Example 1

Meera, an individual, pays a premium of ₹60,000 in a tax year on a life insurance policy on her own life. The policy was issued on 1 August 2020 and the actual capital sum assured is ₹5,00,000. Find the premium that qualifies under Schedule XV.

Show the solution

The policy was issued on or after 1 April 2012 and does not cover a person with disability or a specified disease. So the cap is 10% of the actual capital sum assured.
Cap = 10% × ₹5,00,000 = ₹50,000.
Premium paid is ₹60,000. The deduction applies only to so much of the premium as is up to the cap.
Qualifying premium = lower of ₹60,000 and ₹50,000 = ₹50,000.

Answer: ₹50,000 of the premium qualifies, subject to any overall ceiling under section 123. The excess ₹10,000 does not qualify.

Example 2

Arjun, an individual, paid a premium of ₹30,000 on an ordinary life insurance policy (not single premium) and was allowed a deduction of ₹30,000 in the first year. In the second year he stops paying premiums and does not revive the policy. What is the tax effect?

Show the solution

Check the provision: for a policy that is not a single premium policy, the deduction is withdrawn if the contract ends before premiums have been paid for two years.
Arjun paid premium for only one year before the policy ceased by non-payment and was not revived.
The condition for disallowance is met in the second year, so no deduction is allowed for that year.
The aggregate of deductions allowed in earlier years, ₹30,000, is deemed to be his income of the second year.

Answer: ₹30,000 is taxed as Arjun's income of the second year, and no deduction is allowed in that year.

Exam tips

Write the provision first: Schedule XV read with section 123, then the paragraph. Then apply facts and end with a one-line conclusion.
In premium problems, always state the policy date and the percentage you chose. Marks are given for choosing the right cap.
Read the facts for a hidden trigger such as a sale of house, early withdrawal or lapse. Many questions test the reverse rules.
Do not quote limits for donations or medical insurance unless you are sure of them from the study material. A correct principle is better than a wrong figure.
Use a short list for qualifying and non-qualifying items. It is quick to write and easy for the examiner to mark.

Practice questions from Deductions

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

Which life insurance premium qualifies for deduction under the Income-tax Act, 2025?

An individual can claim premium on a policy on the life of self, spouse or any child. A Hindu undivided family can claim for any member. The premium qualifies only up to 20%, 10% or 15% of the actual capital sum assured, depending on the policy date and the insured person.

Is provident fund contribution allowed as a deduction?

Yes. Schedule XV lists contributions to a provident fund under the Provident Funds Act, 1925, to a notified account in the name of self, spouse or child, and employee contributions to a recognised provident fund. Contribution does not include sums in repayment of a loan.

What is the difference between a deduction for savings and a deduction for donations?

A savings deduction is for investing or saving in a listed way, such as insurance, provident fund or notified deposits. It often has a lock-in or holding period, and breaking it makes earlier deductions taxable. A donation deduction is for giving money to eligible funds or institutions, and it follows its own limits and conditions.

Can I claim tuition fees for all my children?

No. The deduction covers tuition fees paid for full-time education of any two children, at an institution in India. Development fees, donations and similar payments are excluded.

What happens if I sell a house for which I claimed the purchase deduction?

If you transfer the property before five years from the end of the tax year in which you got possession, the deductions allowed earlier are treated as your income of the year of transfer. The same happens if you receive back any sum for which you claimed the deduction.