Section 80C limit is exhausted, how can I still save more tax?

I am 33 years old and work for a large multi-national company (MNC). My salary is ₹1,28,000 a month, but a big chunk goes into tax. I have already invested ₹1,50,000 in Provident Fund, PPF and life insurance. How can I save more tax?

—Name withheld on request

The ₹1.5 lakh investment limit under Section 80C is very low and is quickly exhausted. If you want to save more tax, you can contribute to the National Pension System (NPS). The NPS is a low-cost scheme that helps you save for retirement and offers an additional deduction of up to ₹50,000.

Investors can choose from seven pension fund managers and decide their own asset mix. Since you are young, you should put the maximum in equity funds and the rest in debt. If unable to decide on the asset mix, you can opt for the Lifecycle option wherein your age will determine the allocation to equities and debt, and continually change it every year as you grow older.

While the NPS is a good way to save for retirement and reduce tax, keep in mind certain features of the scheme. The scheme comes with a very long lock-in till your retirement at 60. You can’t withdraw the money before retirement, except in certain emergency situations. This makes the scheme very illiquid.

Even at the time of maturity, an investor can withdraw only up to 60% of the corpus. Though this 60% withdrawal is tax-free, the remaining 40% is mandatorily put in an annuity to earn a monthly pension. This monthly pension is fully taxable as income. The silver lining is that one’s income comes down after retirement so the pension does not increase the tax liability too much.

Another good feature is that investors can change their asset mix depending on their reading of the market. These switches do not lead to any tax incidence. They can also shift from one pension fund manager to another without incurring any tax incidence.

Raj Khosla is Managing Director at MyMoneyMantra.com.