ULIP as a tax saving tool

ULIP as a tax saving tool


Unit Linked Insurance Plans (ULIP) offers an important source for saving on tax and taking an insurance cover. ULIPs aim to match the equity market return while keeping the risk cover and tax benefit. ULIPs offer high returns, risk cover and tax benefit. The premiums paid by the investor are invested in a mutual fund type of investment instrument.

Some plans guarantee the capital invested in the form of premiums paid, reducing the risk associated usually with other forms of equity related investments. As the tenure of these plans is pretty long - upto 15 years - the risk of market fluctuations is taken care of.The cyclical variations are addressed because the investment horizon is pretty long. At the time of investment, the premium payments are converted into units at a NAV. The Fund invests in equity and debt instruments.

ULIPS are flexible and are also quite liquid in nature. ULIPs have a lock-in period of three years. Beyond this period, one can sell the units any time.

The investments are eligible for tax break under Section 80C of the Income Tax Act. The maximum eligible amount of investment under Section 80C is Rs 100,000. Under Section 10(10D) of the IT Act, the maturity proceeds are tax-free.

In a unit plan, the investor makes his contribution to the insurance company / fund. The insurance company / fund use this amount for making investments. The investments are divided into units. Whenever a contribution is made by the investor, the numbers of units to his credit are increased, depending on the market price of the units. A small part of the contribution is allocated towards the insurance cover. In case of unfortunate death of the investor, the beneficiaries of the insured are paid a lump sum benefit as the insurance cover.

On the expiry of the term of the plan, or at any time prior to that, if the investor wishes to exit, the number of units to the credit of the investor is paid off at the prevailing market rate of the units which again is governed by the NAV of the fund. Investors have the flexibility to choose the funds and to change them during the course of time, depending on his strategies and perception of the markets. The price of the units is based on the Net Asset Values (NAV) of the plan, which in turn is determined on the basis of the investment portfolio of the plan. The prices of the units tend to fluctuate over a period of time, depending on the movement in the NAV of the fund. The volatility of the unit prices during the course of the contract effect the overall returns of the investors.

The plans are quite flexible and the investor is given options of switching from one option to the other depending on his preferences - for e.g. changing the mix of debt and equity. Although they promise high returns, it is not free of risk. One needs to make cautious and informed judgment about the amount, the type of fund and tenure of investment. Also, being a hybrid product offering insurance and investment, the amount allocated toward investment is reduced not only by the amount allocated towards insurance, but also because of the other administrative charges which are loaded on the fund.

Initially UTI and LIC had launched such plans. Now other insurance players have also launched these unit plans.

Basically, unit linked insurance plans tend to offer insurance cover along with the savings and some return on the investment.The money paid towards the unit plans is partly spent on the purchase of units of the plan and the balance part is allocated towards the insurance premium. So this product acts as a dual product, in addition to the tax savings.