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Check this guide to make smart investment decisions that not only offer significant tax benefits, but also help you grow your wealth
For those who have predictability and safety at the top of their wishlist when it comes to investment, guaranteed return plans are a safe bet. (Representative image)
As 2024 comes to a close and we step into 2025, there’s a palpable energy around financial planning during this time of year. With the new year just beginning, many will set fresh resolutions, a significant number of which will revolve around finances. In just a few months, the financial year-end will also be upon us. This period isn’t just about celebrations; it’s an ideal opportunity to reflect on the financial choices made over the past year and strategically align your investment portfolio with tax-saving opportunities.
In this endeavour to balance celebrations with responsibility, here is a guide to help you make smart investment decisions that not only offer significant tax benefits, but also help you grow your wealth substantially over a period of time.
Safety and stability with guaranteed return plans
For those who have predictability and safety at the top of their wishlist when it comes to investment, guaranteed return plans are a safe bet. As the name suggests, these plans offer a fixed rate of return on your investment over the tenure of the policy. They are not impacted by the volatilities of the market, which makes them perfect investment avenues for risk-averse investors. The returns and the payouts are pre-defined and fixed, which is really helpful in planning one’s future. Cherry on the cake? The returns go as high as 7%.
Another wonderful feature of guaranteed return plans is that they offer a lot of flexibility in terms of payout options. So these plans are perfect for retirement planning, and just as useful for planning for major milestones like the weddings of children or their education.
Moreover, guaranteed return plans also offer tax benefits under Section 80C of the Income Tax Act. You can claim deductions up to Rs 1.5 lakh every year. And the best part is that the returns on these plans are also tax-free.
Dual benefit of growth and insurance with ULIPs
Next on the list are Unit-Linked Insurance Plans, or simply called ULIPs. These plans are truly versatile investment options that combine the security of life insurance with wealth creation prospects. A combination of equity, debt funds and insurance, ULIPs allow you to reap the upside of the market, if you go in for the long term. You can even decide how the investment portion is allocated. Depending on your time horizon and risk appetite, as well as the prevailing market conditions, you can choose whether to invest in equity or debt, or both. You also get the flexibility of switching between the funds as your needs, goals and circumstances change or the market realities evolve.
The dual benefit of insurance and investment helps you build a significant corpus over time while also protecting your loved ones financially should anything happen to you. And to top it all, these plans also offer tax benefits under Section 80C. The best part is that if you make an annual investment of up to Rs 2.5 lakhs, then the maturity amount is also 100 per cent tax exempt. This feature is unique to ULIPs and is not available in equity investment in any other form, including direct equity or mutual funds. In other equity products, one has to pay 12.5 per cent long-term capital gains tax (LTCG) for gains more than 1.25 lakh. No such tax is applicable on ULIPs as long as the investment amount does not exceed Rs 2.5 lakh per annum.
Securing your retirement with ULIP pension plans
If your goal is to save for retirement, then there are specific types of ULIPs that are designed specifically for that purpose. These are called ULIP Pension Plans and they are for those who want to build a robust retirement corpus. They also come with the same tax benefits. What makes them different is the flexibility that they offer in terms of payouts.
When you retire, you can withdraw up to 60 per cent of your accumulated corpus in lump sum. The rest of the amount stays invested and ensures a steady income stream for the rest of your life. Upon retirement, these plans offer flexibility in accessing your funds. You can withdraw up to 60% of your corpus as a lump sum, while the remaining amount can be converted into an annuity to ensure a steady income stream for life. The power of compounding keeps increasing your returns even as you withdraw funds periodically.
The premiums payments for these plans are tax-deductible which makes them a great choice for tax-efficient retirement planning. Many of these plans come with an additional feature of “Pension Booster”, wherein the premiums that you paid are refunded at the end of the policy term. This further enhances the return on your investment.
Stability and growth with capital guarantee plans
If you are looking for both predictability and reaping market returns, you could look at a plan that combines the strengths of market-linked plans and guaranteed return plans – Capital Guarantee plans. These plans strike a balance between capital preservation and growth. Your investment is basically divided between guaranteed return plans and ULIPs. The former is aimed at safeguarding 100% of your principal amount while the latter aims to deliver market-linked growth. These plans are suitable for medium to long-term financial goals like funding higher education, building an emergency fund or buying a home. These plans also offer tax deductions like under Section 80C.
It’s best to evaluate your risk appetite, long-term and short-term goals before investing. It’s also recommended to compare features and benefits online or consult a financial advisor to get a better understanding of the products you choose.
-The author is head of investment at Policybazaar. Views expressed are personal.
Disclaimer: The views and investment tips by experts in this News18.com report are their own and not those of the website or its management. Readers are advised to check with certified experts before making any investment decisions.
