As investment tools, ULIPs have come a long way in the past decade. They have become more and more popular as tax-saving tools. With the introduction of the LTCG in 2019, they came at the forefront. Budget 2021 has made ULIP investors wary about this popular tax-free investing option. The large tax benefit of section 10(10D) of the Income Tax Act, along with the chance to earn a better return through equity investment, has been the most convincing reason for investors to choose ULIPs. What is it that makes ULIPs work and what can you expect from them? Let’s find out.
ULIPs are tax-saving tools which help you invest as well as secure your family- all with one single plan. A part of the premium paid regularly is invested in funds selected as per your risk appetite, and the other part is utilized for a life cover. This makes them neither pure insurance plans nor pure investments, but hybrid products.
The return on your new ULIP investment would no longer be tax deductible if the annual premium is more than Rs 2.5 lakh. Only the maturity proceeds of ULIPs with yearly premiums up to Rs. 2.5 lakh will be eligible for tax exemption under Section 10(10D). The return on maturity of ULIPs with annual premiums exceeding Rs 2.5 lakh would be classified as capital gain and taxed appropriately under section 112A. However, the cap of Rs. 2.5 lakh on the annual premium of ULIPs will apply only to policies purchased on or after February 1, 2021. The new taxation will only apply to new ULIPs, so you don't have to worry about your existing ULIPs as you can continue to invest your premium until the policy matures.
1. With the newly introduced tax exemption, ULIPs are expected to gain more popularity and insurers are expected to provide more benefits to lure investors.
2. As a result, more and more insurers are expected to lower charges and offer more incentives.
3. In totality, it is expected to be a good year for ULIPs, with better plans and better ULIP returns.
We have all read about the global economic slowdown arising due to the pandemic. India will also be affected sooner or later. Markets will change and investors will be worried. At such a time, a ULIP can be a saving grace as it allows great flexibility in terms of switching between equity or debt oriented and balanced funds. You can easily bring your investments back on track if either of the categories isn’t performing well.
Here are 6 tips to buy the best ULIP in India.
ULIPs were the only market-linked instruments to be left out of the ambit of the LTCG tax. That is why they came to the fore in 2019. However, there are also other reasons for the growing popularity of ULIPs, like their EEE tax status.
EEE refers to Exempt-Exempt-Exempt. As per this principle, ULIPs are exempt on three fronts.
a) The first exemption is on the investment amount
b) The second exemption is on the interest earned from the investment.
c) The third exemption is on the maturity amount.
Mortality charges are generally levied on insurance products, which is why they are applicable on ULIPs as well. It is the actual cost of insuring a life, and is deducted on a monthly basis. Mortality charges depend on the policyholder’s age, sum assured, gender, smoking habits, health factors, etc. It is usually less for healthier, younger persons.
Learn what are mortality charges in ULIPs?
Nowadays, some insurers have started offering return of mortality charges. This saves the cost of a ULIP investment significantly, and converts into better ULIP returns.
Since ULIPs have started becoming more and more popular, competition in the market has increased. Insurers have started offering lucrative benefits for their ULIP. A major advantage has come in the form of lesser charges.
A ULIP generally comes with a lot of charges like mortality charges, fund management charges, premium allocation charges, partial withdrawal charges, switching charges, revival charges, and miscellaneous charges. These charges, of course, made for a considerable expense. However, now you can reap all the benefits of a ULIP without too many charges.
Canara HSBC Oriental Bank of Commerce Life Insurance Invest 4G ULIP offers 8 different fund options for flexibility in investing. It levies no charges on premium allocation, partial withdrawal, switching, revival, policy administration, medical examination, or miscellaneous expenses. Furthermore, it also offers loyalty additions and wealth boosters to increase your ULIP returns.
Overall, 2021 seems to be a good year for ULIPs. Even more so if you are a first-time investor, as you would rather play safe in the beginning.
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