If you want to lead a comfortable retired life, it is essential to do proper investment planning while 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 Systems (NPS), Equity-based Mutual Funds (MF), and Employees’ Provident Funds (EPF). These investments differ in risk, profitability, liquidity, stability, tax benefits, and cost. So, it would be best 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 India’s most profitable and popular investment products. What makes ULIPs unique is their dual benefits, including life insurance and investment. The insurance provider uses a part of your premium to invest in equity, debt, or a mixture of multiple 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 now be treated as long-term capital gain, similar to equity-based MFs. Under the new tax regime, you must pay a 10% tax on earned returns.
However, if your yearly premium is less than INR 2.5 lakh, a ULIP can be a compelling investment option for creating a retirement fund.
2. National Pension System (NPS)
With NPS, you can 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.
You can withdraw up to 60% of your NPS fund upon retirement. It is compulsory to use the remaining money to buy an annuity plan. You must 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, the returns depend on the financial market, leading to more risk. If you earn a return of over INR 1 lakh from the investment in a financial year, you must 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 safer than most investment instruments and provides a tax deduction under Section 80C of the Income Tax Act of 1961. Until last year, the returns from an EPF were tax-free. However, per the Budget 2021 proposal, you must now pay a tax on the interest you earn if your yearly contribution to the fund is over INR 2.5 lakh.
Only ULIPs offer a life cover and many flexible benefits to help you make more advantages among all these options. You can use a ULIP calculator to compare plans and find the most suitable one in minutes.
