Macbook Air 13 128gb with Catalina 10.15.7 on board having ~30GB of space available, but still showing "There is not enough space on the disk space available" to install the Xcode 120.1 update. Current Xcode 12.0 installation is taking about 45gb... Any solution?

as a workaround, download xcode 12.0.1 xip file directly from https://developer.apple.com/download/more/ to an external drive and install from there. that will save you 11.21gb on your internal drive