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Do you often find yourself scrambling through the internet looking to invest money so that you can save some tax in this financial year? If yes, it is likely that you’ll end up making hasty decisions and in just a few years you will also feel that most of these investments are not useful enough for you.
Tax saving investments often has a long lock-in period, during which you cannot withdraw any money from the investments. That is why a little planning is necessary when you want to invest for tax-saving.
But, often you are stuck with urgent timelines of showing your investment proof and need a quick investment option which you may not regret later. Unit linked insurance plan or ULIP is one such investment where you may invest first and seek goals later, although you should prefer to plan your goals first and invest later.
Here’s what makes ULIPs unique and un-regrettable for quick tax-saving decisions:
ULIPs fulfil your tax-saving need for more than one year. So, even though, you had to make a quick decision this year, next year you can simply continue the same plan.
ULIPs are highly customizable even after you have started investing in the plan. You can change the portfolio strategy, allocation, and even transfer funds to a different fund option within the ULIP.
Although ULIPs have multiple asset allocation strategies you can use, you always have control over your portfolio. Once you decide to allocate the ULIP investment to one of your financial goals, you can readjust the fund allocation to minimise risk.
You would want to assign your ULIP investments to long-term goals only, as ULIPs tend to do far better over long periods.
As ULIPs are life insurance plans, they always have a life cover associated with them. Thus, every time you invest in a ULIP, you also enhance your family’s financial security.
Apart from enhanced life cover, ULIPs can also provide protection for your financial goal. For example, if you are using ULIP plan to save for the higher-education goal of your child, you have the option to ensure that your child receives the money as intended even if you are not there anymore.
The insurer pays your family the life cover amount but continues to invest as you would have done. Your child will receive the accumulated fund value at the intended maturity of the policy.
While the tax saving on your investment in ULIP plans is limited to the 80C limits, you can invest any amount in the ULIPs. Even if your annual ULIP investments exceed the 80C limits the maturity value you receive can still be completely tax-free.
To ensure that your maturity proceeds do not attract tax all you need to do is invest only up to 10% of the policy sum assured in any policy year.
For example, if you start investing in a ULIP plan with a life cover of Rs. 20 lakh, you can deposit a maximum of Rs 2 lakhs in a year and stay untouched by the tax.
Therefore, you can use ULIPs to accumulate huge tax-free wealth as well.
With the 10% rule of taxation, you can increase or decrease your investment amount in ULIP later. You should anyway, keep the scope open for investing a higher sum in the ULIP plan when buying without a long-term goal.
Income growth is highly likely for you, especially when you start investing early. Keeping your sum assured high will save you from the efforts of buying a new ULIP plan when your income grows,
For example, if you are 30 years of age and can invest Rs. 1 lakh a year into ULIP, you can opt for a sum assured of Rs. 15 lakhs. Thus, in future, if you want to increase your annual investment your ULIP investment will not become taxable.
Plan Goals Before Saving Tax
You can use every tax saving investment for a specific purpose and that is how you can make them useful again. For this article, we will focus on unit-linked insurance plans or ULIP investments.
ULIPs being a long-term investment commitment may quickly start to bore you into making an irrational decision. This happens only because you may not have had a clear goal in mind except that of saving taxes when you bought the ULIP plan.
However, it does not mean you cannot plan and use existing ULIP for the same afterwards.
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