Once you have exhausted the limit of  1 lakh allowed under 80C; what next? This is a perplexing question for most taxpayers. Usually investors stop at 80C because of lack of awareness of other investment options that too helps to save tax.

Anyway don’t worry if you have used up your limit to save tax under section 80C because there are other options through which we can save more tax. However, most people are unaware of these options.

1. Section 80 CCF – Additional Rs. 20,000 on investments towards approved infrastructure bonds.

Subscription to long-term infrastructure bonds is exempt from assessment year 2011-12 onwards. This allows an individual to invest an additional  20,000 in infrastructure bonds, and have that amount deducted from taxable income in addition to the  1 lakh deduction under 80C.

2. Section 80D: Get medical insurance cover for you and your family.

Deduction is available for payment of medical insurance premium up to  15,000 for self/family and also up to  15,000 for insurance of parents of the assessee.

The premium is to be paid by any mode of payment other than cash and the insurance scheme should be framed by the General Insurance Corporation of India and approved by the Central Govt. or Scheme framed by any other insurer and approved by the Insurance Regulatory & Development Authority.

One can claim the total of the following items for deduction under section 80D:

Maximum of  15000 for assessee, spouse and children.
Another maximum of  15000 for dependent parents. Note that maximum of 20000 if dependent parent is senior citizen.

3. Section 80E: Higher education loan.

Deduction is available for interest component of loan taken from a financial institution or approved charitable institution for higher studies. The payment of the interest thereon will be allowed as deduction over a period of up to 8 years.

Further, by Finance Act, 2007 deduction under this section shall be available for pursuing higher education by self and also by spouse or children of the assessee. Higher education means any course of study pursued after passing the senior secondary examination or its equivalent.

4. Section 80G: Donation to certain funds, charitable institutions etc.

Donations made to funds like Prime Minister’s Relief Fund, National Children Foundation, any University or educational institution of ‘national eminence’, etc. are deductible from taxable income according to section 80G. Contribution to exempt charities is deductible depending on the charity and as per approval.

5. Section 24B: Invest in house property.

Investing in a house is considered as one of the best tax-planning tools due to various tax benefits provided under the Income Tax Act, 1961. A deduction of interest component of home loan is available under section 24B, with a maximum limit of  1,50,000.

Deduction allowed on principal part of repayment is  1,00,000 (Section 80C). Thus the total deduction an investor gains while taking a home loan is  2,50,000.

6. Section 54EC: Buy Capital Gain Bonds (NHAI and REC bonds).

An investor having long-term capital gain from sale of asset can either invest the capital gain amount in Section 54EC bonds (currently being issued by REC and NHAI) and thereby save the entire amount of tax, or actually pay the tax and invest the balance in quality equity funds.

It may be noted that these Section 54EC bonds may be used to save tax on any long-term capital gain and not necessarily from sale of property. For example, sale of non-equity mutual funds, bonds, debentures, gold, jewellery or even gold ETFs may result in long-term capital gains. Such gains may be saved by investing the capital gain amount in the 54EC bonds.

The drawback to these bonds is that the maximum investment in any one financial year is capped at  50 lakhs. The interest currently is 6% per year, that too fully taxable. Moreover, the money is locked in for 3 years.

However, the up side is that on account of the tax savings, the bonds effectively offer the investor an up-front 20% savings and at the end of three years, he gets his original investment back. Thus the gains outweigh the drawbacks.

Finally, the key to investing prudently is to keep in mind the long-term savings aspect and not just the current tax savings. So spread your savings in multiple baskets with varying profit/risk profiles, so that in case of a market downturn, you can average your risk exposure.

Related posts:

1. Six Well-Known Ways to Invest 1 Lakh Rupees to Save Tax
2. Help Build India & Save on Tax; Buy Infrastructure Bonds

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This is because senior citizens are on a fixed income and they have no flexibility to make more money, to change jobs or otherwise better themselves financially. To accommodate this reality, taxes are often adjusted for senior citizens.

Reasons Why the ‘Seniors‘ Enjoy Tax Benefits

In India we have 100 million senior citizens roughly 10% of the total population. Nevertheless we give due care and respect to this vulnerable population. This stems from our rich culture and philosophy of respecting the elderly. This is one major reason why we tax our senior citizens less. However allowing them to keep more of their pensions also helps the government in return.

Public Expenditure is Lowered: Governments spend a lot for the aged through social welfare programs. However if our senior citizens had the financial security, they could look after themselves better without much government support. This could bring down the government expenditure on these social welfare programs. This is one logic behind relaxation of taxes for the aged.

Helps to Lower Burden on Family: Seniors have health issues that can become catastrophic in an instant. A lower tax rate keeps from burdening the senior and his/her family when illness strikes. Reasonable, lower tax rates help the elderly as they face their most difficult years.

Senior Citizens Use Less Government Services: Senior citizens tend to use fewer government services than working people. They drive less, they do not have children in public school, and they certainly commit few crimes. Overall, seniors do not cost the government in the same way that younger people do. Therefore, the government is able to justify a lower rate.

Senior Citizens are a Major Political Force: Seniors, despite modest incomes, have also become a major political force in the country. They are retired with more time on their hands to lobby their local and national government officials for special favors. Senior citizens are more organized under political parties, NGOs, and other groups. This has helped them to become a pressure group.

Younger people with senior relatives also want their elders to be treated fairly.  This demand has also influenced government decisions to lower taxes on senior citizens. This helps adult sons and daughters to keep more of their own money because their parents aren’t losing their money to taxes.

Our senior citizens are those who shaped the destiny of our country when they were young. They have put our country on a growth trajectory and they still guide our generation to attain still more success. Therefore, tax benefits to our elderly are just a small show of gratitude and affection that our government and our nation as a whole could give them for their services.

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However, will the sequel stand up to its expectation or will it end up just like a remake gone awful?

Direct Tax Code is drafted to replace the out dated Income Tax Act and will bring in sweeping changes to the overall tax structure. Moreover the DTC will go hard on offenders with provisions to imprison the tax evaders together with levying huge fines. Even tax officials who assist tax evasion will be punished.

How will DTC affect 80C Schemes?

Looking from an investment point of view, let’s see how the new tax code will affect those investments coming under 80C, which were earlier exempt from tax.

• Public Provident Fund: Direct Tax Code do not affect Government, public or recognized public provident fund and it will continue to enjoy the benefit of tax exemption up to Rs 1 lakh.  Therefore, investors who have invested a bulk of their savings in PPF need not worry.
• Pension Schemes: DTC do not exempt pension schemes administered by the Pension Fund Regulatory and Development Authority from the 80C. These schemes will continue to enjoy the Rs. 1 lakh tax deductions.
• Insurance: Life insurance and annuities will enjoy the benefits of tax deductions under 80C in the DTC regime also. Another positive implication of DTC is that an additional Rs. 50,000 deduction is proposed for payment of life insurance, tuition fee for children and health insurance.
• Equity-Linked Saving Scheme: DTC will fully make away with the tax exemption for ELSS once it is implemented. You can invest in ELSS this year and avail tax benefit for the fiscal. However, see to it that you do not carry it to the next fiscal because this might be the last year such tax benefit for ELSS is available.
• National Saving Certificates: Will no longer come under 80C benefits under DTC and will not enjoy any tax deduction.
• Five Year Fixed Deposits: After DTC is implemented five year fixed deposits with banks, or post offices and deposits in senior citizen saving schemes will be removed from 80 C tax deduction and will begin to attract taxes.
• Home Loans: Another prominent segment under 80C was home loans. Under DTC repayment of home loans do no qualify for tax exemption. This is a terrible blow for those who are presently repaying loans. The only relief is that interest paid on the loan is deducted from taxation.

Investing in Infrastructure bonds will also lose its sheen as it too will be removed from the 80C list.

DTC draws Mixed Response

One positive element of DTC is that the limit of income tax exemption is raised to Rs. 2 lakh per annum. For senior citizen the income tax exemption is raised to Rs. 2.5 lakhs from Rs. 2.4 lakhs.

In addition, tax slabs have been definitely widened which makes it attractive for individuals. The Direct Tax Code proposes to tax 10% on income between Rs 2 lakh and Rs 5 lakh, 20% within Rs 5 lakh-10 lakh range, and 30% above Rs 10 lakh.

Corporates can heave a sigh of relief as their tax will be at 30% without surcharge and cess. Further, many other long awaited changes are proposed in DTC such as introduction of General Sales Tax, abolition of securities transaction tax etc.

For one thing, the whole affair is a mixed bag of advantages and disadvantages for different sections of the population. It must be seen whether Direct Tax Code will stand up to its expectation as a remedy of all that was wrong in the Income Tax Act of 1961.

Though there are many benefits under the new Direct Tax Code, it is clear that many schemes coming under 80C will suffer if DTC is implemented in the present form. It is a direct blow to many small investors looking for a safe place to invest their hard earned savings.

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So, what is this Fixed Maturity Plan or FMP all about? It is nothing more than a debt instrument that invests mostly in fixed income generating instruments like Commercial Paper, Certificate of Deposits, bonds issued by governments and reputed companies.

FMP Offers Low Risk, Good Returns and Tax Benefits

By investing in non-equity instruments, FMP lowers the risk considerably and at the same time gives moderate returns. Fixed Maturity Plans are good alternatives in comparison to equity based mutual funds, which invest in high risk securities to make profits.

FMPs invest in multiple funds making it possible to reap more return than investing the sum in a single instrument like fixed deposit. Interestingly, the rate of return of FMP is expressed as indicative rate and is usually higher than FD of same tenure.

You can choose your FMP as inflation adjusted instrument, protecting your returns from hiking inflation. Besides, just like in a Mutual Fund, you can choose the earnings from Growth or Dividend options for FMP. If that wasn’t enough, FMPs are also a good tax saving option which adds to your kitty.

Tax Benefits of FMPs

In comparison to other debt products FMP favors two sorts of tax benefit.

Taxation Differences: FMPs (Growth option) for tenure more than 1 year are treated as long term debt instrument thus lowering the tax burden to 11.22%. This is a remarkable difference if you fall under the highest tax slab; a similar FD would have cost you 33.66%, lowering down your net return.  Similarly, for a short term FMP (Dividend option, less than one year), a dividend distribution tax of 16.61% has to be paid which is again probably lesser than your tax slab.

Double Indexation Benefit: FMPs for tenure just more than a year benefit from double indexation; provided you have opted for inflation indexation. With indexation, the purchasing cost of FMP increases with inflation, thus reducing your actual profit received at the time of maturity. As your FMP is for two financial years, you can benefit from double indexation, further reducing the earnings. Lesser the return in figures, lesser is the tax paid, which in turn works out to higher yield.

To understand this simpler, suppose your FMP with 10% indicated return cost you Rs. 100. The maturity amount is 110 after one year, giving you Rs.10 earnings. With indexation according to inflation index of say 4%, your purchasing cost rises to 104, making your profit to Rs. 6. With double indexation, the inflation index for the next year is also taken in to account, say 3%. This increases the purchase price to 107.12 reducing the earnings to just Rs. 2.88. A tax on earnings of Rs.2.88 with double indexation is definitely lower than Rs.10 without indexation.

Facts about Fixed Maturity Plan

Closed-ended Funds: FMPs are close ended funds which means that the instrument is available only till the offer lasts. You can join the plan only when it is issued, so keep yourself informed about the future issues. Besides, the investors cannot exit till the tenure period is over. The lock in period helps the fund manager to maximize the use of the funds to make the maximum yield.

Minimum Investment: One of the major benefits of FMPs is that it is within reach of even small investors because the minimum investment is usually about Rs. 5000. Though it is usually marketed to high end investors there is no bar against anyone from investing. If you are a small investor, be sure to call your mutual fund manager and inquire whether any fund offer is due.

Indicated Returns: Another feature of FMPs are they show only indicated returns and doesn’t guarantee fixed returns. This is because there is a regulation that bars fund companies from guaranteeing a definite return. But at maturity mostly, you receive what is specified as the indicated return.

Dividend Option and Growth Option: To avail maximum tax benefit, Dividend option works best for short term FMPs ranging from 3 months to less than a year. For long term FMPs spanning more than a year, Growth option gives better tax reduction.

Limitations of FMP

Poor liquidity: As the fund is close ended the investor cannot exit from the fund as she pleases. This reduces the liquidity of FMP. Therefore, before investing in FMP make sure that there is no need for the funds within the tenure period.

Exit Load High: When an investor decides to exit from the instrument there is a charge she must pay. This is called the exit load. For FMPs the exit load is around 1% to 2% of the net asset value, which is high to discourage people from exiting the scheme before it matures.

Who Offers FMP?

As discussed earlier this fund usually targets rich people and companies making huge investments. Therefore, there is not much advertisement and the commission is low. However, FMP is available for retail investors and so take extra effort to be informed of any new issue and make sure that you invest in it for better yields with low risk.

The inflation adjusted FMP yields more returns and high tax benefits than a Fixed Deposit. With a low risk and high security on the money, FMP scores high among the debt instruments.

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With a little foresight and expertise you can considerably reduce your tax burden. Also simultaneously you can increase your non-taxable income. As this requires a certain amount of expertise in the financial field, you can make use of the services of a tax planner for this.

A tax planner is a financial expert who can help you with your tax planning exercise. In a more professional terminology a tax planner is a financial expert or a group of financial experts having experience in planning taxes for personal as well as, small and large businesses.

Why do you need a Tax Planner?

The important reasons for consulting with a tax planner are:

Save Money from Tax: In normal course you would not have given much care about a detailed tax planning and hence would have over looked many areas where you could have saved tax.

Helps to Identify Grey Areas: Once a tax planner does the process for you step by step, you will start seeing some of the ‘grey areas‘ which were taking up most of your money as taxes. Also he will help you invest your time and money in a better way.

If you still find it uncomfortable of having a Tax Planner dictating things to you, let us try to understand the importance of a Tax Planner in another way. Let us say you are an IT professional working in an IT firm and you draw a salary of 1Lac plus per month. You have investments in a business, do share trading when possible and also have also built a house.

Naturally this brings you in the highest tax bracket and hence is liable to pay the highest income tax. But if you can plan in advance, you can ensure that you save tax to a larger extend by decreasing the tax outflow.

This is where a tax planner is of greatest help to you. He can help you take maximum benefit by making intelligent use of available legal provisions like Tax deductions, depreciation, rebates, allowances, exemptions etc. Besides, he can help you make sound financial investments keeping in focus both your short term as well as long term goals.

Work of a Tax Planner

As your Tax planner and advisor, he does the following functions to help you plan your taxes better,

Understand Your Income Patterns: This will include all your possible income like, (1) Earned Income (Salary, income from owning small business, consultation) (2) Portfolio Income (Trading & Investment, Buying & Selling of Real estate, Buying & Selling of Antics or Cars etc. (3) Passive Income (Rent, Business profit, income from creating & selling intellectual property like writing, publishing etc., and income from Multi-level Marketing).

Study about Taxes Applicable to You: After understanding your various income details, he will next study about the various taxes applicable to you. For instance you may have to pay house tax if you are having a house but may not have to pay sales tax or corporate tax if you are not a business person. But if you are a business person having a house then you will be entitled to pay all the three taxes.

Make Detailed Plan to Save Income: After understanding the income as well as the tax payable, your tax planner will start to work on how to reduce your tax payable. He will start working out a plan taking into account legal provisions like tax deductions, exemptions, rebates and allowances.

As part of this he will help you to identify and invest in schemes which will benefit your tax savings. He will also help you identify areas where you can claim deductions item by item, which can be written off like, medical benefits, property tax, Personal property Tax, Interest paid on investments, contributions to charity etc. etc.

Help You to Calculate Depreciation: Another area where he can be of help to you is in calculating depreciation values for your assets and the tax payable on them. Depreciation is the method by which the cost of an asset is spread out over a period of time and tax calculated accordingly on the adjusted cost basis. This is applicable for assets used for business purposes or rental purposes.

Give You Sound Advice on Retirement Investment: Yet another sector you will need a tax planners help is in deciding the right kind of investment for your retirement which also gives you tax benefit.

Today there are several insurance companies selling retirement policies combining insurance with pension plans but you and I are at a loss to identify the right one that will cover all your needs. Hence your tax planner will be a better judge as to which will be the right product for you considering the rising tax rates.

So next time, you plan your taxes make sure you make use of the services of a good tax planner. You will be happy you did!

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