Maximising Your Tax Savings with Health Insurance under Section 126 (Formerly Section 80D)

Paying taxes is both a civic duty and a financial reality for earning citizens. To balance revenue collection with social welfare, India’s progressive tax structure aims to minimise the burden on lower- and middle-income households. Recognising that taxes reduce discretionary spending power, the Income Tax Department provides dedicated provisions to promote essential financial habits, most notably, securing health insurance.

Under the Income Tax Act, 2025, the tax deduction rules previously governed by Section 80D of the Income-tax Act, 1961 have been restructured and codified as Section 126. While the core benefits, limits, and eligibility criteria remain identical to the erstwhile Section 80D framework, Section 126 streamlines these tax deductions under the reorganised tax law. 

Understanding Section 126 (Section 80D) Deduction Limits

While health insurance primarily shields your savings during hospitalisations, Section 126 delivers immediate returns by lowering your taxable income. Choosing comprehensive coverage from reputed insurers like Niva Bupa allows policyholders to secure reliable cashless hospitalisation while optimising their yearly tax savings.

Under Section 126, an individual taxpayer can claim deductions ranging from ₹25,000 up to a maximum cap of ₹1,00,000 per financial year, depending on the age of the covered family members.

Annual Deduction Cap Matrix

Key Medical Expenditures Eligible Under Section 126

Section 126 extends well beyond basic individual health insurance premiums to encompass several healthcare costs:

• Preventive Health Check-ups: You can claim up to ₹5,000 per financial year for routine health screenings for yourself, your spouse, children, or parents.
• Central Government Health Scheme (CGHS): Contributions towards CGHS or government-notified health schemes qualify under the primary ₹25,000 threshold.
• Direct Medical Expenses for Senior Citizens: If your senior citizen parents do not have an active insurance policy due to advanced age or pre-existing conditions, out-of-pocket medical expenses (medicines, hospital care, therapies) can be claimed up to ₹50,000 per year.
• Multi-Year Policies: Lump-sum premiums paid for multi-year policies (e.g. 2 or 3 years) can be claimed proportionally across each relevant tax year.
• Health Riders on Life Insurance: Premiums paid towards critical illness or health riders linked to life insurance plans are also eligible.

How the ₹5,000 Preventive Health Check-Up Limit Works

The ₹5,000 preventive check-up allowance is not an additional top-up over your statutory limits; it operates as a sub-limit within the overall cap.

Practical Example:

If you pay ₹22,000 in annual health insurance premiums for your family (under 60 years), you can claim up to ₹3,000 spent on preventive check-ups. This brings your total claim to the maximum eligible limit of ₹25,000.

Smart Tax Strategy for Dual-Income Couples

Working couples filing separate tax returns can strategically structure their healthcare insurance to maximise household savings:

1. Spouse A purchases a comprehensive health policy for themselves, their children, and their own parents.
2. Spouse B purchases a policy covering their own parents.

By dividing parental coverage across two working spouses, a household can collectively claim tax deductions exceeding ₹1,00,000, reaching up to ₹2,00,000 if both sets of parents are senior citizens.

Important Compliance Rules & Record Keeping

To ensure your tax deduction remains valid during assessment, adhere to these key regulatory conditions:

• Old Tax Regime Requirement: Section 126 / Section 80D deductions are applicable strictly under the Old Tax Regime. They are not available if you opt for the New/Simplified Tax Regime.
• Non-Cash Payment Mandatory for Premiums: Health insurance premiums must be paid via digital modes (net banking, UPI, credit/debit cards) or cheque. Cash payments for insurance premiums are completely disqualified.
• Cash Allowed for Check-Ups: Unlike insurance premiums, expenses incurred for preventive health check-ups can be paid in cash and still qualify under the ₹5,000 sub-limit.
• Document Maintenance: Retain your tax certificates issued by insurers, payment proofs, diagnostic lab invoices, and medical prescriptions in your records for tax verification.       

Conclusion

Health insurance serves a vital dual purpose: it guards your family against medical inflation while providing effective tax optimisation. By utilising Section 126 (formerly Section 80D), you can reduce your annual taxable income by up to ₹1,00,000 per year, allowing you to protect your long-term financial health while lowering your tax burden.

Frequently Asked Questions (FAQs)

1. Is Section 126 different from Section 80D?

Section 126 under the Income Tax Act, 2025 is the restructured version of Section 80D from the Income-tax Act, 1961. The deduction limits, category caps, preventive check-up sub-limits, and eligibility criteria remain identical, but Section 126 is the updated statutory section reference.

2. Can I claim Section 126 deductions under the New Tax Regime?

No. Deductions under Section 126 are exclusively available under the Old Tax Regime. The New Tax Regime offers lower slab rates but does not allow deductions for health insurance premiums or preventive health check-ups.

3. Can I pay my health insurance premium in cash and still claim tax deductions?

No. To qualify for a deduction under Section 126, premiums must be paid using non-cash channels, such as UPI, debit/credit cards, net banking, or cheque. However, payments for preventive health check-ups up to ₹5,000 are permitted in cash.

4. Can I claim tax benefits for health insurance premiums paid for my in-laws?

No. Section 126 only permits deductions for policies purchased for yourself, your spouse, dependent children, and your biological or legal parents. Premiums paid for in-laws, siblings, or grandparents do not qualify.

5. Are top-up health insurance plans and critical illness riders eligible under Section 126?

Yes. Premiums paid for top-up health insurance plans and critical illness riders attached to basic health or life insurance policies are eligible for tax deductions, provided they fall within the applicable annual sub-limits.