Maxed Out 80C? Where Else Can You Invest and Save Tax

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.