Introduction
Investing to save income tax is a smart way to build wealth. With Rs 1.5 lakh every year, the current tax deduction limit under Section 80C, one can invest in ULIPs to generate returns. This way one also gets to benefit from the power of compounding. Unfortunately, many tend to postpone tax planning till the month of March and end up investing in sub-optimal schemes.
A prudent investor should start planning early from December itself and research the investment avenues carefully, so as to settle for a plan with multiple benefits. We shall now study how ULIPs make for an ideal investment plan this tax season, benefits of ULIPs and how returns from ULIPs are computed by way of NAVs.
What is ULIP exactly?
Let’s start with the basics – what is ULIP plan? Unit linked insurance plans are hybrid products that mix life insurance, investments and tax savings. The policyholder has the freedom to choose from equity, debt and hybrid funds. We shall study the benefits of investing in ULIPs, from the tax angle and other monetary aspects.
- Capital Protection against inflation – The sum assured in ULIPs is guaranteed as long as the premiums are paid, and the policy is in force. While the life insurance component is not inflation protected because of being a fixed cover-fixed tenure product, the investment portion has the potential to generate inflation beating returns, especially if an equity fund is selected. Your ULIP plans returns can create considerable wealth in the long run.
- Liquidity – ULIPs are liquid after the lock-in period of five years. This is possible by redeeming units or by making premature withdrawal or surrender of the policy at a loss. Further, loans are available against the policy, depending on the type of policy tenure, its sum assured or the fund value at the time of applying for a loan.
- Exit Option – One has the option to surrender or terminate the policy in case of any financial loss. However, the insurer will credit the proceeds of the discontinued policy to the policyholder only on completion of the lock-in period.
- Tax Implications – Premium payment towards ULIPs are eligible for tax deductions under Section 80C with a limit of Rs 1.5 lakh in a financial year. The proceeds from the maturity or claims on a ULIP policy are exempt under Section 10 [10D] of the IT Act, 1961.
Conclusion
The correct approach to tax saving is to build wealth over a period of time. When the primary intention is wealth creation and not just saving the tax outgo, it has multiple advantages. Firstly, one picks the best suited investment scheme and secondly, this instills financial discipline in the long run, whereby regular premiums help build a corpus in the long term. A mindset change can go a long way in reaping greater rewards.
Unlike traditional plans where a sum assured decides the premium, ULIPs function differently with growth plus protection. In ULIPs, the premiums paid decide the extent of death benefit. As policies can be of regular premiums or a one-time single premium, the sum assured varies accordingly. The Net Asset Value [NAV] determines the financial performance of ULIPs. The ULIP NAV is published on the website of every insurance provider and one must do a comparison, before zeroing in on a plan. Hence, book your date with ULIP Plans this tax season and see your money grow in the long run.