Best investment options for tax benefits and financial security

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© Provided by The Financial Express Depending on your needs and factors influencing them, you can start planning early and carefully weigh your options.

Starting off a new year isn’t complete without the ritual of making resolutions, and making better financial decisions arguably tops the list. Tax benefits are a major component of financial planning as they are a great first step towards saving money. Usually, tax-saving doesn’t show up on the radar of most people until the deadline is staring them in the face. However, it’s always better to think ahead so that you can meticulously plan your financial future over the year.

It’s important to allocate your money to options that not only promise a great investment portfolio but also offer better financial security. This is why investment-cum-insurance products are emerging as a great option to invest in. Given the current market conditions, they not only offer higher returns but also help save tax. Further, with the third COVID wave gaining momentum, the insurance element in these products stands to provide extended financial security to not just the investor, but the dependents as well.

Let’s take a closer look at the investment options for you to consider for saving tax.

Unit Linked Insurance Plan (ULIP)

The feature that makes ULIPs popular among investors is the tax-free income generated from them. Especially, the new-age or 4th generation ULIPs are highly popular because of their transparent nature and reduced charges. The policy term ranges anywhere between 5 and 30 years for these plans and the policyholder can choose to exit after 5 years or after maturity, and walk away with a tax-free fund value. Additionally, they also offer better flexibility with the option to easily switch funds between debt and equity depending on the requirements. You can get up to 12-15% return with these plans and they also allow the policyholder to save tax under Section 80C and 10(10) D of the Income Tax Act, 1961.

Also, the investor should make the best out of the fact that investing in ULIPs is tax-free for an annual premium of up to Rs 2.5 lakh as per Section 10(10)D. So, investing at least Rs 2.5 lakh is a wise decision as compared to mutual funds where they will be incurring a tax of 10% above Rs 1 lakh. The ULIPs also stand to provide a return of up to 12-15%. Therefore, if a 30 year old invests Rs 10,000 over 20 years, they can accumulate a tax-free corpus of around Rs 1 crore which will be taxable in case of mutual funds.

Guaranteed return plans

Guaranteed return plans are best known for the financial security they provide to the investor’s hard-earned savings. They allow the policyholder to lock in their money for longer periods without the worry of market fluctuations affecting the returns. However, these products are great for tax saving as well. Guaranteed return plans come with an in-built feature of life insurance component that is 10 times the annual premium. What’s more – these premiums are eligible for tax rebate along with the maturity amount under Section 10(10D).

Most importantly, they are a far better bet than the falling interest rates of FD which currently stand at around 5% that is taxable. On the other hand, guaranteed return plans can fetch you up to ~6% interest depending on factors like age and lock-in period. For instance, if a 30-year-old invests Rs 10,000 in Tata AIA Fortune Guarantee Plus plan for 10 years, they can avail a 5.92% tax free interest and also get a life cover of around Rs 14 lakh, which is not available with FD.

Term insurance

Yet another prominent option to save tax and secure the future of your loved ones during these difficult times is term insurance. The premiums paid against the policy qualify for tax exemption under Section 80C and 10(10) D of the Income Tax Act, 1961. The maximum limit here is Rs 1.5 lakh, and you can also save tax for policies purchased for parents, spouses or kids apart from self. Also, in case of the unfortunate death of the policyholder, the sum assured given to the dependents is also exempted from tax.

Child plans

It’s always advisable to start off early when it comes to investing in your child’s future. Several investors like to opt for a secure and guaranteed option in such cases. This is where Unit linked child plans come into play. You can start investing in these plans as early as within 60-90 days of your child’s birth. The advantage of investing early is that you can have a bigger corpus when you need. The waver of premium feature is yet another reason to opt for these plans as it guarantees the payment of future premiums in case of the sudden death of the policyholder. The investor can avail tax exemptions under the 80C of Income Tax Act, 1961 which allows a maximum tax exemption of Rs 1,50,000 per year for various child plans.

Depending on your needs and factors influencing them, you can start planning early and carefully weigh your options. Don’t forget to evaluate your decision based on your tax regime, income bracket, age-group and family size, among other factors.

(By Vivek Jain, Head-Investments,

Disclaimer: These are the personal views of the author. Readers are advised to consult their financial planner before making any investment.