If you want to lead a comfortable retired life, it is essential to do proper investment planning while you are earning. The key is to find the right investment instrument for creating a fortune. Various investment avenues are available in India. These include Unit-Linked Investment Plans (ULIPs), National Pension System (NPS), Equity-based Mutual Fund (MF), and Employees’ Provident Fund (EPF). These investments differ in the associated risk, profitability, liquidity, stability, tax benefits, and cost. So, you need to be thorough before deciding where to invest your hard-earned money.
While you can use an MF or ULIP calculator to ascertain the estimated returns on investment, you also have to consider other parameters. Read on to learn better.
1. Unit-Linked Investment Plans (ULIPs)
A ULIP is one of the most promising and popular investment products available in India. What makes ULIPs unique is their dual benefits, which comprise life insurance and investment. The insurance provider uses a part of your premium to invest in equity, debt, or a mixture of mulitple funds to generate returns. You can choose the funds as per your financial goals and risk appetite. With long-term investments in top-performing ULIP funds, you can create substantial wealth to make your retired life more comfortable.
ULIPs also offer many tax benefits. Section 80C of the Income Tax Act, 1961 allows you a tax deduction of up to INR 1.5 lakh per year on the premium paid. Previously, the maturity benefits from a ULIP were also tax-free under Section 10(10D) of the Act if the premium was up to 10% of your total sum assured. Since Budget 2021, the returns are tax-exempt only if your yearly premium is less than INR 2.5 lakh. For ULIPs with an annual premium over INR 2.5 lakh, the return will be now treated as long-term capital gain, similar to equity-based MFs. Under the new tax regime, you have to pay a 10% tax on the returns earned.
However, if your yearly premium is less than INR 2.5 lakh, a ULIP can serve as an effective investment option for creating a retirement fund.
2. National Pension System (NPS)
With NPS, you have the option to choose how to diversify your investment among equity, government debt, and corporate debt funds. This way, you have the flexibility to decide your investment, depending on your financial goals for retirement. With NPS, you are eligible for a yearly tax-exemption of up to INR 1.5 lakh under Section 80C of the Income Tax Act, 1961. Section 80CCD allows an added tax benefit of INR 50,000.
Upon reaching the retirement age, you can withdraw up to 60% of your NPS fund. It is compulsory to use the remaining money to buy an annuity plan. You need to pay a tax according to your tax slab on any returns generated from the annuity plan.
3. Equity-based MFs
While creating a retirement fund, an equity-based MF investment can benefit you. Equity MFs offer high returns over an extended period. However, here, the returns depend on the financial market, leading to more risk. If you earn a return over INR 1 lakh from the investment in a financial year, you have to pay a 10% Long-Term Capital Gain (LTCG) tax on it.
4. Employees’ Provident Fund (EPF)
An EPF offers a yearly return of 8.5%, making it an ideal investment choice for salaried individuals. It is relatively safer than most other investment instruments and offers a tax deduction under Section 80C of the Income Tax Act, 1961. Until last year, the returns from an EPF were tax-free. However, as per the Budget 2021 proposal, you will now have to pay a tax on the interest you earn if your yearly contribution to the fund is over INR 2.5 lakh.
Among all these options, only ULIPs offer a life cover and many flexible benefits to help you avail of more advantages. You can use a ULIP calculator to compare different plans and find the most suitable one in minutes.