Section I: Income Tax and Your Investments

• Ques: ULIP: Byuying new ULIP for tax saving - not the best idea as DTC has proposed changes
• Ans: All financial goals of an individual can be achieved through one ULIP i.e., kids education, marriage, or business set up; your retirement, tax benefits, liquidity, and tax free maturity. Key points about ULIP are:
  • Tax benefits :Investment in ULIP saves tax u/s 80 C up to Rs. 1,00,000. This limit will be reduced to Rs. 50,000 after the implementation of the Direct Tax Code (DTC).
  • Higher Returns on investment: The returns are higher as compared to other tax saving investments like PPF/NSC/KVP/infrastructure bonds which offers around 8% whereas in ULIP average return of last 5 years was much higher.
  • Tax efficient returns: The returns from ULIP are tax free except pension plans. Whereas NSC, bonds and fixed deposit interest is taxable. Once the DTC proposal is accepted, the maturity proceed will be taxable if the annual premium is less than 5% of the sum assured. The present limit is 20% of the sum assured; hence, more risk cover will be included which will reduce the returns.
  • Multipurpose investment: ULIP gives insurance cover along with investment in equities. If you need high insurance cover, then term insurance is better as the cost of term insurance has come down in the past, especially if you buy online.
  • Transparency and professionalism: Daily NAV is declared as per IRDA rules and your investment is controlled by experienced professionals.
  • Reduces share market risk: ULIP makes you invest regularly and for long term just like SIP in mutual funds thereby reducing the chance of loss due to market fluctuation. Insurance needs are generally long term which further helps in investing money for long term. The minimum lock in period has been raised from 3 years to 5 years. Pre-mature withdrawals will become taxable after the DTC implementation.
  • Diversification: It helps in investing equity shares of a number of companies in different industries which in case of direct investing in equities is difficult.
  • Best ULIP : There are numbers of ULIP plans an insurance company offers with multiple features but the best ULIP are those which gives fund value plus risk cover in case of death . It may cost you a little bit more but serves the very purpose of ULIP- insurance cum investment. Other type of ULIPs offers either fund value or risk cover whichever is higher.
  • AVOID ULIP: If you do not want insurance cover or are already sufficiently insured than you better go for ELSS (equity linked saving scheme) because the mortality charges are very high and reduces your liquid funds.
    The thumb rule for insurance need - get yourself insured for eight times of your gross income plus your existing loan liabilities. The commission charged in ULIP is also higher than ELSS.
  • When Term insurance is better than ELSS and ULIP: If you have small liquid funds and you are the only working person in family than term insurance scores over ULIP or ELSS. Because you need financial security more than high returns and you cannot commit for long term.
  • When should ULIP and ELSS be avoided: It is further to be remembered that if your investment u/s 80C of Rs 1,00,000 is already done than SIP in a diversified mutual fund of at least 5 years experience from SBI/ HDFC/ scores over ELSS as the liquidity is higher than both and entry loads are low. In ULIP and ELSS funds can not be withdrawn before 3 years whereas mutual funds investment can be withdrawn in 3 days in case of emergency. Moreover mortality charges reduce your corpus.
  • When should ULIP, ELSS and mutual fund be avoided: If you do not want to take high risk of share market and are happy with return around 8% than PPF scores over it. But liquidity in PPF is low. All three should be avoided if you are not certain for your long term investment goals or income is not as regular as your financial commitment in these plans. These are beneficial more if invested for long term, at least for 10 years.
  • NO limit: ULIP does not have Rs. 70,000 investment limit like PPF in a financial year. It also allows smaller investments.
  • Future of investment in India is tilted towards ULPP (Unit Linked Pension Plan): India needs huge investment in the coming years for further growth in infrastructure sector such as airport, construction, energy, mining, port, power etc. and Govt. of India is also encouraging PPP (public private partnership) in various plans .Private players need funds to execute these plans and equity shares is the medium they can generate big money for long term. Investors need high return to beat the inflation. Investors have less time and understanding of market for achieving financial targets. Further it is need based as average Indian is under insured and is not investing for the retirement.