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Why HDFC Life "Click2Invest-ULIPs" Makes Tax Savings Sense?
It's the time of the year, when individuals are deciding on various tax planning instruments. Among the many instruments, that provide you tax benefits is the Unit Linked Insurance Plans (ULIP).
What are the advantages of a ULIP?
1) Sec 80C
Tax Benefit For those looking at tax savings instruments the Unit Linked Insurance Plan (ULIPs) is an excellent choice. One of the biggest advantages that the ULIP gives against other traditional tax saving instruments like the PPF is that it provides insurance cover.
The minimum cover that a Unit Linked Insurance Plan gives is 10 times the annual premium paid. The insurance cover is pretty decent.
So, if you invest Rs 50,000 a year and if something were to happen to you the nominee gets an amount of Rs 5,00,000 immediately. In addition the amount invested also continues till the scheme is in existence. The insurance cover may not be as high as a term policy, but is decent enough. You thus get the amount invested, plus 10 times the amount of premium as insurance cover. Income earned is tax free.
Under section 10(10D) of Income Tax Act, 1961 any amount you get as maturity benefits are tax free in the hands of policyholders. However, premiums paid in any year should not exceed 10 per cent of the basic sum assured.
2) Tax Free
The second advantage is that the returns from ULIPs are tax free. This compares only with the PPF, whose interest income is tax free. Most other tax saving instruments like bank tax saving deposits, NSC etc., attract tax on the interest income earned.
3) Returns can be higher
In the ULIP there is no fixed returns. The returns can be much higher than the traditional tax saving instruments. Your returns would actually depend on the investment choice.
If you have opted for fund investment in the equity markets your returns could be very high or be low depending on how the stock markets perform. It's important to note that there are some charges like insurance premium charge, fund management charge and policy administration charge.
4) Liquidity
In terms of liquidity the Unit linked Insurance Plan has an edge, over an instrument like the PPF. You can withdraw the amount after 5 years, while in the case of the Public Provident Fund withdrawal is allowed only after completion of 7 years, in which case there is partial withdrawal. Full withdrawal is allowed only after the completion of 15 years.
Conclusion
In which scheme to invest to gain from Sec 80C would purely depend on you. ULIP returns might be lower if you invest in the money market scheme because of the various charges, but it does provide decent insurance coverage.
They can give you higher returns, if you invest in funds that invest in equities. Liquidity is the same like most other instruments like tax saving deposits, where it is 5 years lock-in.
Overall, one would recommend HDFC "Click2Invest-ULIPs, because there is an ability to earn higher returns, apart from the insurance coverage and also the fact that the returns are free from income tax.
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