Santosh lives (1)/ by the principals (2)/ he professes.(3)/ No error (4)

Answer

2

Explanation

Principles will replace principals because Principal (Adj./Noun) : the most important, main principle (Noun) : a moral rule or a strong belief that influences your action.
Look at the examples given below:
New roads will connect the principal cities. He has high moral principles. Hence, by the principles is the right usage