ULIP plan or Unit Linked Insurance Policy is quite different from your conventional life insurance policy. ULIP policies are rather smart and unique to invest money. A part of the premium paid towards the policy is invested on your behalf, and the other half is used to provide life cover.
Here are a few tips to get the most out of your ULIPs.
- Invest in a fund of your choice:
Usually, there are two different classes of investment available to you. Equity investments include high return potential but are risky. A debt portfolio provides consistent lower returns over a longer period. As a part of the ULIP scheme, you get to choose between these investment options. You can also invest in a debt-equity mix portfolio. The mixed portfolio will offset the risk of equity and will ensure balanced returns every year.
The portfolio of equity also varies from company to company. A company that has a better claim ratio usually has a better investment strategy. For example, the Tata AIA claim ratio is 99.06%, which means that the portfolio is well diversified.
- Diversification:
The companies will offer a different portfolio with varying debt-equity ratios. The insurers will also provide pure equity and a pure debt portfolio. You only have to select the class of investment, and the company handles the rest. The portfolio is handled by the active fund manager and ensures you get the most from your investment. The portfolios come with built-in diversification. You will not have to do a lot of heavy lifting to earn through this investment insurance plan.
The active fund manager also hedges your investment against the volatility of the market. This ensures uniform return over the tenure of the term. After you have amassed your desired corpus through the equity ULIP scheme, it is wise to transfer the entire amount to a debt fund to protect your corpus. The returns will be higher, and life will be easier.
- Taxation:
The 2021 budget brought in few changes to the tax on ULIP investment schemes. ULIP is a hybrid scheme, so it is affected by a few different sections of the Income Tax Laws.
- Section 80C is applicable since the plan offers life coverage. The premium you pay towards the policy will be deductible up to ₹1,50,000.
- This year the budget brought in a new regulation. If the annual premium paid towards the policy is below ₹2,50,000, then the return of the policy will not be taxed. Therefore, section 10(10D), which deals with maturity benefits and death claims, will also apply to this.
- If the annual premium crosses ₹25,000, then the amount received after maturity will be taxed under Section 112A.
- However, all the new changes apply to ULIP policies bought on or after 01/02/2021.
Few other points to remember:
- Since the returns are considered capital gains, if the amount matures under 12 months, they will be categorised as Short-Term Capital Gains. You will have to pay a flat 15% on it.
- If you withdraw the amount beyond 12 months, you will only have to pay 10% of the maturity amount.
What is an ideal tax plan in such a case?
Investing in a ULIP scheme whose premium is below ₹2,50,000 per year and withdrawing the money only after the lock-in period is advisable. This will allow enjoying the deduction of Section 80C and Section 10(10D).
A Unit Linked plan might seem tricky at first, but they are excellent plans for investment. They offer multiple strategies. ULIP policy also offers a higher return while protecting against the unpredictable conditions of the market.