Tax planning is part and parcel of financial planning. It’s not only about minimising the tax liability; it’s about selecting the correct investment options that correspond to your financial goals. Unit Linked Insurance Plans (ULIPs) and 80CCD deductions under the National Pension Scheme (NPS) are two such investment avenues that are tax-efficient and at the same time enable wealth creation and securing one’s retirement. Here, we will talk about ULIPs and 80CCD deductions and how to use them for tax benefit maximisation.
Strategies to maximise tax benefits –
Understand ULIPs:
Unit Linked Insurance Plans or ULIPs are a very unique combination of investment and insurance. They serve the dual purpose of providing life cover and market-linked returns. It is based on investing a part of the premium in life insurance and the rest in different types of funds, such as equity, debt, or balance. Of note, the premiums paid toward ULIPs are deductible under Section 80C of the Income Tax Act, up to the maximum limit of Rs.1.5 lakh.
Choose ULIPs for long-term goals:
ULIPs are especially advantageous when linked with long-term financial targets like planning for your kid’s education, the wedding of your child, your retirement, and others. The longer the policy term, the greater the time the investment section has to accumulate, potentially resulting in greater returns. Moreover, ULIPs with long-term investment horizons tend to reduce risks involved with market volatility.
Consider the lock-in period:
ULIPs have a lock-in period of 5 years meaning you must stay invested for all this time to avoid surrender charges and to make the most of your money. This lock-up period is aimed at enhancing long-term investment and realising better profits.
Opt for higher insurance cover:
In ULIPs, the higher the insurance cover, the greater the death benefit. It is crucial to note that the death benefit, or the amount received by the nominee following the death of the policyholder, is tax-free under Section 10(10D) of the Income Tax Act.
Use top-up facility:
ULIPs allow you to invest additional money over and above your monthly premium during the policy term if you have extra cash. This sum is also eligible for a tax deduction under Section 80C, subject to the aggregate maximum of Rs. 1.5 lakh.
Make the most of the maturity benefit:
The maturity funds from ULIPs, paid after the policy term if the policyholder survives the time, are tax-free in the hands of the investor under Section 10(10D) of the Income Tax Act, subject to certain criteria.
Understand 80CCD deduction:
Section 80CCD of the Income Tax Act provides deductions for payments to the National Pension Scheme (NPS). This provision is further subdivided into two subsections: 80CCD (1), which covers employee/self-employed person contributions up to Rs. 1.5 lakh, and 80CCD(1B), which offers an additional deduction of Rs. 50,000 for contributions to NPS. The entire deduction limit under this provision is Rs 2 lakh.
Contribute to NPS:
Regular donations to the NPS will help ensure your retirement while also saving you money on taxes. Your donations of up to Rs 1.5 lakh are eligible for a deduction under Section 80CCD (1), with an additional Rs 50,000 under Section 80CCD(1)B.
Benefit from employer’s contribution:
If your employer additionally contributes to your NPS account, up to 10% of your pay (basis + DA) can be deducted from your taxable income under Section 80CCD (2). This exceeds the restrictions specified in Sections 80CCD (1) and 80CCD(1B).
Additional NPS contribution:
In addition to the Rs 1.5 lakh deduction granted under section 80C, NPS users can deduct up to Rs 50,000 for their NPS investments. This falls under section 80CCD(1B).
Opt for auto choice in NPS:
The NPS’s ‘Auto Choice’ investing option is a unique feature that automatically adjusts the asset allocation between stock, corporate bonds, and government securities based on your age. This aids in increasing earnings and tax benefits.
Go for Tier II NPS account:
The Tier II NPS account is a voluntary savings account that one can get back the money at any time. If you are a state or government employee, you can avail of this deduction on contributions not exceeding Rs 1.5 lakhs under Section 80C.
Withdraw NPS corpus strategically:
If you are over 60 years of age and retired, you can claim up to 60% of the NPS corpus as a tax-free lump sum. This 40% balance should be used as a monthly annuity plan that will provide you with a steady income throughout your retirement years.
Invest in pension funds:
Section 80CCD also covers pension funds that are under the supervision of the Pension Fund Regulatory and Development Authority (PFRDA). These funds may attract contributions to enjoy a tax break, and hence, reduce your taxable income.
Maximise 80C limit:
80CCD(1B) can only be used after Rs. 1.5 lakhs has been deducted from Section 80C under other investments or expenses, such as life insurance premiums, ELSS, PPF, tuition fees, home loan principal repayment, etc.
Choose the right ULIP:
Choose ULIPs as per your risk appetite. Equity-oriented ULIPs may be a way to get higher returns and maximise tax benefits in the long run, whereas Debt-oriented ULIPs may provide stable returns with lower risk.
Monitor your ULIP:
An annual review of your ULIP performance and fund switch to optimise returns and tax benefits is advisable. ULIPs give investors the flexibility of being able to shift between different funds based on their risk appetite and market conditions.
Regular NPS contributions:
Make it a point to contribute to your NPS account as often as possible. Not only does this lead to creating a substantial retirement corpus, but it also results in availing maximum tax benefits.
Withdraw NPS partially:
After three years of starting your NPS account, you can make partial withdrawals of up to 25% for certain objectives such as child education, marriage, home purchase or construction, and essential sickness treatment. This sum is tax-exempt.
Plan your retirement:
Make sure that when you depart the NPS system, you do so tax-efficiently. The lump sum payment you get at retirement and the annuity income for the rest of your life are both tax-free, resulting in a tax-efficient retirement income.
Conclusion
Tax preparation is an important component of financial planning. Understanding the complexities of tax-saving tools such as ULIPs and 80CCD deductions for NPS will allow you to optimise your tax benefits and save a large amount of money. However, while investing, your primary goal should not just be to save taxes but also to connect these assets with your financial objectives. Remember that the key to good tax preparation is to plan and invest throughout the year, rather than waiting until the last time. Happy investing!
