Introduction
The importance of financial planning cannot be emphasized more in today’s times. With rising inflation, burgeoning population with higher disposable incomes and increased consumption demand, meeting the financial goals of self and family have become of paramount importance. This opportunity of wealth creation is only possible during the working years, to provide financial protection during the sunset years of retirement and insurance cover for the family, in case of death of the earning member.
Hence, personal finance decisions need careful study and analysis of the investment options available in the market. Further, it would be more beneficial if the investment scheme has added features like minimum lock in period, minimum hassles of paperwork, inflation-proof returns, low risk instrument, withdrawal facility in case of unforeseen emergencies, flexibility in premium payment and scope for capital appreciation. We shall consider two financial instruments: ULIPs and NPS and compare both to arrive at the winner.
Meaning of ULIP
ULIP stands for Unit Linked Insurance Plan, i.e. a plan which provides wealth creation along with life cover. The name reveals itself as being a multiple advantage plan with life cover protection, income tax benefits and market-linked growth potential. We shall now study each of the features briefly:
1. Life insurance – A Unit Linked Insurance Plan [ULIP] provides life cover. This is usually the sum insured or the market value of the investment [fund value], whichever is higher. This provides financial protection to one’s family in the event of sudden death of the earning member.
2. Tax exemption – A ULIP policy provides the insured person tax benefits as follows:
a. Under Sec 80C of the IT Act, 1961, the premiums paid towards ULIP are allowed as a deduction from taxable income up to INR 150,000 in a financial year.
b. The lump sum amount on maturity under ULIPs are tax exempt u/s 10(10D) of the IT Act, 1961.
3. Attractive returns suited to risk appetite – A ULIP policy offers the investor the option to invest in either high growth equity, safe debt instruments and balanced or hybrid plans catering to diverse risk profiles from conservative, moderate and aggressive.
4. Shifting option – The investor can shift his money from equity to debt and vice versa, depending upon the fund performance.
5. Flexibility of premium payment – An investor can change the frequency of premium payment i.e. quarterly or yearly as per convenience.
How to Select the Ideal ULIP Plan
How do you select the best ULIP plan for yourself? An ideal ULIP would be one which complements the financial goals of the investor. Some of the desired features would be:
- Choice of investment in a wide range of asset classes
- Minimum premium allocation charge with entire premium being invested
- Flexible payment structure with option of multiple premium payments
- Higher lump sum value on maturity like higher sum assured, higher fund value of the plan, a percentage of premiums paid
- Free switching of funds from equity to debt and vice versa, along with minimum switching charges
Meaning of NPS
National Pension Scheme is a voluntary, defined contribution pension system, introduced by the Government of India, with similar features like ULIPs, namely a market linked retirement plan with option to switch between fund managers and change allocation of fund invested between equity, debt and Government securities.
The two drawbacks of the NPS compared to ULIPs are:
- NPS does not offer life cover
- At the time of retirement or 60 years of age: 40% of the maturity amount has to be mandatorily invested in an annuity scheme, the monthly pension being fully taxable. Out of the balance 60% accumulated corpus withdrawn, 40% is tax exempt, while 20% is taxable.
Conclusion
After looking into the pros and cons of investing in ULIPs and NPS, it can be safely concluded that the ULIPs clearly score on the tax benefit front. Consider an example. For instance, if one has invested Rs 5 Lakh in ULIP by way of premiums and the total gains excluding the invested amount comes at Rs 20 Lakh. This means the take home is about Rs 25 Lakh. If this is withdrawn before the lock-in period of 5 years, then the entire amount falls under tax slab. However, if the ULIP is withdrawn after maturity, the entire gain of Rs 25 Lakh is tax exempt. One must invest wisely and ensure that your hard-earned money works hard for you.