Chapter VIII deductions under Income Tax Act 2025: Complete practical overview

The Income Tax Act 2025 recasts the familiar deduction framework of Chapter VI-A of the Income Tax Act 1961 into a new, reorganised Chapter VIII. While the underlying policy intent remains broadly similar, the provisions have been reshaped, regrouped and in some areas tightened to make compliance more systematic and rule-bound.

This article walks through each component of Chapter VIII in a structured way, comparing where relevant with the older regime, and highlighting key planning and compliance points for the assessee.

1. Structure of Chapter VIII – Deductions in the new Act

The new law preserves the concept of deductions from “Gross Total Income”, but with a redesigned Chapter layout:

• Part A – General provisions on Chapter VIII deductions (Section 122)
• Part B – Deductions linked to specified payments (Sections 123 to 137)
• Part C – Deductions tied to specified incomes (Sections 138 to 152)
• Part D – Deductions for other incomes (Section 153)
• Part E – Deductions for other qualifying payments/persons (Section 154)

Note
Chapter VIII under the Income Tax Act 2025 is conceptually parallel to Chapter VI-A under the Income Tax Act 1961 (covering Section 80C, Section 80D, Section 80IA, etc.), but with a new numbering scheme and some structural refinements.

2. Part A – General conditions for Chapter VIII deductions (Section 122)

Section 122 lays down foundational rules that govern all deductions under Chapter VIII. These must be satisfied before any specific deduction is considered.

2.1 Core conditions

1. Deductions allowed only from Gross Total Income

   • Chapter VIII deductions are to be applied against “Gross Total Income”, computed under the normal computation provisions of the Act.

2. Cap at Gross Total Income

   • The aggregate of deductions claimed under Chapter VIII cannot exceed the Gross Total Income.
   • In effect, deductions cannot create or enhance a loss.

3. No double deduction

   • If any outlay, contribution or amount has already been claimed as a deduction either:
     • under any other section of the Act, or
     • in any other tax year,
       the same amount cannot be again claimed under Chapter VIII.

4. Timely filing of return is mandatory

   • The assessee must file the Return of Income on or before the due date under Section 263(1).
   • If the return is belated, no deduction under Chapter VIII is permitted.

5. Deductions must be claimed in Return

   • The assessee has to specifically claim every desired deduction in the Return of Income.
   • Omissions may not be entertained later unless rectified in accordance with law.

6. Arm’s length / market value for inter-unit transactions

   • Where there are transactions between different units/companies of the same assessee and such transactions feed into a deduction-eligible business, the value must be:
     • at market price, or
     • at arm’s length price (where specified domestic transfer pricing applies).

7. Independent computation of eligible business income

   • Income of any “eligible business” linked to a Chapter VIII deduction must be calculated as per the main computation provisions of the Act, and only thereafter can the deduction be applied.

8. Meaning of “Gross Total Income”

   • For Chapter VIII purposes, “Gross Total Income” is the total income computed under the Act before applying any Chapter VIII deduction.

2.2 Important judicial principle: Deduction despite business loss

Consider this example:

• Income from business: loss of Rs. 150 lakhs, which includes Rs. 100 lakhs from an eligible business (say, an enterprise referred to in Section 138 – analogous to Section 80-IA of the 1961 Act)
• Income from other sources: Rs. 400 lakhs
• Gross Total Income: Rs. 250 lakhs

Issue: Can the assessee still claim deduction in respect of the eligible business income of Rs. 100 lakhs?

In CIT v. Reliance Energy Ltd [2022] 441 ITR 346 (SC), the Assessing Officer argued that since the “business head” showed an overall loss, no deduction was available. The Supreme Court, however, held that as long as Gross Total Income is positive, the deduction must be allowed.

Key takeaway
The existence of a loss under the “business” head does not, by itself, extinguish Chapter VIII deductions, provided overall Gross Total Income is positive.

3. Part B – Deductions in respect of certain payments (Sections 123–137)

Part B broadly replaces the old regime of Section 80C to Section 80U-type payments. Major components are summarised below.

3.1 Section 123 – Life insurance, PF, tuition fees, housing repayment etc.

Section 123 is the functional successor of Section 80C of the Income Tax Act 1961. A major structural change is that the menu of eligible investments and payments is now moved out of the section text and instead placed in Schedule XV.

3.1.1 Key conditions of Section 123

• Eligible assessees:

  • Only Individuals and HUFs can claim this deduction.

• Overall monetary ceiling:

  • Aggregate of all eligible items in Schedule XV cannot exceed Rs. 1,50,000 in a tax year.

• Year of payment:

  • The deduction is allowed only for amounts actually paid or deposited during the relevant tax year.

3.1.2 Overview of Schedule XV – Eligible items (illustrative summary)

Below is a grouped summary of items in Schedule XV that qualify under Section 123 (subject to the combined cap of Rs. 1,50,000):

1. Life insurance and annuity

   • Life insurance premium on life of:
     • Individual, spouse and any child (for Individuals), or
     • Any member (for HUF).
   • Premium cap based on percentage of Sum Insured:
     • Policies issued on/after 01.04.2022: maximum 10% of Sum Insured
     • Policies issued on/before 31.03.2022: maximum 20% of Sum Insured
     • Policies for persons with disability issued on/after 01.04.2013: cap 15% of Sum Insured
   • Sums paid under deferred annuity contracts, subject to no cash-option clause.
   • Salary deductions for securing deferred annuity (restricted to 20% of salary).

2. Provident funds and retirement schemes

   • Contribution to statutory provident funds covered by the Provident Funds Act.
   • Contributions to notified provident funds set up by the Central Government (in name of individual/spouse/children or any member in case of HUF).
   • Employee contributions to recognised provident funds and approved superannuation funds.
   • Contribution to notified pension funds, including certain plans of Life Insurance Corporation and other notified insurers.

3. Government schemes and small savings

   • Subscription to specified Government securities/deposit schemes.
   • Deposits under Sukanya Samriddhi Account (SSA).
   • Investment in savings certificates under the Government Savings Banks Act.
   • Term deposits of five years or more with scheduled banks under notified schemes.
   • Five-year deposits under Post Office Time Deposit Rules, 1981.
   • Deposits under Senior Citizen Savings Scheme Rules, 2004.

4. Mutual funds and equity-linked products

   • Contributions to Unit-linked Insurance Plans and specified mutual fund schemes (as per Schedule VII – certain serial numbers).
   • Subscription to equity shares or debentures in eligible capital issues and units of notified mutual funds (subject to CBDT approval).