Thursday, January 30, 2014

How to choose a term insurance plan

In these times of high inflation, Rs 20 won't buy you much. But it is enough to buy Gopal Gidwani a term insurancecover of Rs 49.99 lakh. The 38-year-old Pune-based professional pays an annual premium of Rs 7,652 for the Anytime online term plan from IndiaFirst Life Insurance he bought two months ago.

Term insurance policies have become very popular in the past 12 months. "Premium rates have come down, companies are advertising term plans in a big way and the online channel is very convenient. This is why sales of term plans have shot up," says Amitabh Chaudhry, CEO and managing director of HDFC Life. The company launched its click2protect online term plan earlier this year. Aviva Life Insurance, which launched its i-Life plan in May 2011 has sold more than 18,000 policies in the past 10 months. Aegon Religare Life Insurance has sold nearly 25,000 i-Term plans.
Financial planners contend that a term plan is the best form of insurance because it gives a very high cover at a low price. The premium of a term plan is a fraction of what you have to shell out when you buy an endowment plan, a money-back policy or a Ulip with the same coverage. Of course, this is also because there is no investment component in a term plan. The entire premium goes in covering the risk. Before you buy a term plan, here are a few things to consider.
How much cover do you need?
Life insurance is meant to provide the dependants of the policyholder with enough money to replace his income in case he dies. Your life insurance must take care of the following things: the basic expenditure that your family will incur, major expenses like marriage of children and other liabilities like loans. If the life cover is inadequate, it defeats the whole purpose of insurance. For instance, a good part of the Rs 12.5 lakh insurance cover that Michael Fernandes (see picture) has will go into paying the Rs 3 lakh car loan that he has recently taken. The Goa-based sole breadwinner of a family of four needs an insurance cover of at least Rs 30 lakh. Turn to page 5 to know how to calculate your life insurance needs.
Till when do you need the cover?
The tenure of the term plan is almost as important as the amount of cover. An insurance policy should cover a person till the age he intends to work. Till a few years ago, this was 60 years. "However, a person may continue working beyond the age of 60," points out Andrew Cartwright, chief actuary, Kotak Life Insurance. Moreover, late marriages and having children at a higher age mean responsibilities do not end at 60. Experts believe a person needs a life cover till at least 65 years, though it may vary according to circumstances.
Don't take a short-term cover of 15-20 years that ends when you are in your 40s. The premium will be very low because you will be insuring yourself for the non-risky years. In the 40s, the need for life cover is at its zenith. If you take fresh insurance at that age, it will cost you a bomb. You might even be denied the cover if you have not been keeping well.
Choose a term plan that offers you the flexibility of fixing the tenure. Many online term plans come with fixed tenures of 15, 20, 25 and 30 years. Others don't offer insurance beyond 60 years. So, a 32-year-old will not be eligible for a 30-year-plan and will have to buy a 25-year cover, which will end when he is 57 years. It is best to avoid such plans and opt for a policy that can be customised to your needs.
Mumbai-based Vivek Kumar has configured the tenures of his five term plans in a way that they match his financial goals. Whenever a goal is achieved, the corresponding term plan terminates. "I have tried to ensure that in case I am not around, my daughter's education and marriage will be taken care of," he says.
Have you factored in inflation?
Have you bought a Rs 50 lakh cover and think it is sufficient for you? Think again. The value of Rs 50 lakh will only be Rs 28 lakh after 10 years assuming an inflation of just 6%. To get around this problem, some insurance companies offer plans where the cover increases by 5-10% every year or is indexed to inflation. "As your sum assured would automatically increase in the coming years, it would take care of the increase in your income as well as inflation," says Rituraj Bhattacharya, head, product development and market management,Bajaj Allianz.
/photo.cms?msid=12391111 Inflation is high right now but may scale down in the coming months. The long-term average inflation in India is expected to be 6-6.5%. "A 5% increase in the insured amount won't match inflation. If you must go for such plans, opt for either a 10% annual increase or an index-linked one," says Cartwright.
Kotak Life Insurance offers a plan that allows you to increase your sum assured at certain stages of your life. You can raise the sum assured by up to 50% when you marry or buy a new home. A 25% increase in sum assured is allowed on the birth of a child or the first, third or fifth anniversary of policy purchase. However, your revised cover cannot be more than three times the original sum assured.
Keep in mind that the premium of such plans is higher than that of an ordinary plan. A more cost-effective solution is to review your insurance needs at every life stage and add more cover if required
The opposite of an increasing cover is a plan where the cover comes down. Such plans are meant to cover big-ticket credits such as a house loan. The cover comes down as you repay the loan and eventually ends. Here again, experts recommend a simple term plan than go for complex offerings.
The return of premium plan, for instance, is a sham that gives the buyer the total premiums paid at the end of the plan, but the inflation-adjusted value of this sum is meagre. Paying a higher premium for this benefit is not advisable. Likewise, the single premium option is not a good idea because it frontloads the entire cost of the cover. In case of early death, the premium for the rest of the term goes waste. In a regular plan, the buyer gets the same insurance benefit by paying far less.



10 best tax-saving investments

Multiple options. Contradictory advice. And a deadline that's approaching fast. Many taxpayers find themselves in this situation at the beginning of the year when they have to make tax-saving investments.
Are you also confused? Before you make a choice, go through our cover story to know which is the best option for you. We have ranked 10 of the most common investments under Section 80C on five basic parameters: returns, safety, flexibility, liquidity and taxability. Every investment has its pros and cons
The PPF may not have a very high return, but its tax-free status, flexibility of investment and liquidity by way of loans and withdrawals, gives it the crown in our beauty pageant. Equity-linked saving schemes come in second because of their high returns, flexibility, liquidity and tax-free status. However, traditional insurance policies, an all-time favourite of Indian taxpayers, manage the ninth place because of the low returns they offer and their rigidity.
Some readers might be surprised that the much reviled Ulips are in the third place. The Ulip remains a mystery and its returns are seldom tracked. We checked Morningstar's data on Ulips and found that the returns have not been very good in the past 1-5 years. Even so, it can be a useful instrument for the smart investor who shifts his money between equity and debt without incurring any tax.
We have tried to separate the chaff from the grain by assigning a star rating to the various tax-saving options. Whether you are a novice or a seasoned investor, you will find it useful. It will help you cut through the clutter and choose the investment option that best suits your financial situation.
What the ratings mean:

RETURNS: 8.7% (for 2013-14)
This all-time favourite became even more attractive after the interest rate was linked to bond yields in the secondary market.
The PPF is our top choice as a tax saver in 2014. It scores well on almost all parameters. This small saving scheme has always been a favourite tax-saving tool, but the linking of its interest rate to the bond yield in the secondary market has made it even better. This ensures that the PPF returns are in line with the prevailing market rates.
This year, the PPF will earn 8.7 per cent, 25 basis points above the average benchmark yield in the previous fiscal year. The benchmark yield had shot up in July and has mostly remained above 8.5 per cent in the past six months. Although the yield is unlikely to sustain at the current levels, analysts don't expect it to fall below 8.25 per cent within the next 2-3 months. So it is reasonable to expect that the PPF rate would be hiked marginally in 2014-15.
The PPF offers investors a lot of flexibility. You can open an account in a post office branch or a bank. However, the commission payable to an agent for opening this account has been discontinued, so you will have to manage the paperwork yourself. The good news is that some private banks, such as ICICI Bank, allow online investments in the PPF accounts with them. There's flexibility even in the quantum and periodicity of investment.
The maximum investment of Rs 1 lakh in a year can be done as a lump sum or as instalments on any working day of the year. Just make sure you invest the minimum Rs 500 in your PPF account in a year, otherwise you will be slapped with a nominal, but irksome, penalty of Rs 50. Though the PPF account matures in 15 years, you can extend it in blocks of five years each. However, this facility is no longer available to HUFs.

The PPF also offers liquidity to the investor. If you need money, you can withdraw after the fifth year, but withdrawals cannot exceed 50 per cent of the balance at the end of the fourth year, or the immediate preceding year, whichever is lower. Also, only one withdrawal is allowed in a financial year.
You can also take a loan against the PPF, but it cannot exceed 25 per cent of the balance in the preceding year. The loan is charged at 2 per cent till 36 months, and 6 per cent for longer tenures. Till a loan is repaid, you can't take more. If you dip into your PPF account, be sure to put back the amount at the earliest. Withdrawing from long-term savings is not a good strategy if you do it frequently. It can dent your overall retirement planning.
The PPF is especially useful for risk-averse investors, self-employed professionals and those not covered by the Employees Provident Fund and other retiral benefits.
BRIGHT IDEA: Invest before the 5th of the month if you want your contribution to earn interest for that month as well.

RETURNS: 17.5 per cent (Past five years)
The potential for high returns, wide choice of funds and flexibility make these funds a good tax-saving option for equity investors.
Equity-linked saving schemes (ELSS) have the shortest lock-in period of three years among all the tax-saving options under Section 80C. However, this should not be the most important reason for investing in this avenue. Being equity funds, these schemes can generate good returns for investors over the long term. In the past five years, this category has created wealth for investors with average returns of 17.5 per cent.

However, this potential to earn high returns comes with a higher risk. There is no guarantee that your investment will generate positive returns after the 3-year lock-in period. The category has generated an average return of 2 per cent in the past three years. Even the best performing funds have churned out disappointing returns. The returns will naturally mirror the performance of the stock markets. Therefore, only investors who have the stomach for a roller-coaster ride should consider this option.

Should investors avoid ELSS now, especially since the stock market is close to its all-time high? Not really, because the stock market has returned to the previous high after a 6-year gap and, therefore, is not overvalued at all. "Since the stock market is reasonably valued now, ELSS should generate good returns for investors who can remain invested for 5-7 years," says Gajendra Kothari, managing director and CEO, Etica Wealth Management.
Though the large-cap Sensex and Nifty are at higher levels, the mid-cap and small-cap indices are at much lower levels. This means there is enough value in midcap stocks, which should help the fund managers do well in the coming years. Selecting the right scheme is crucial since there is significant variation in the returns of different schemes.
Though past performance is an important parameter, also take into account the track record of the fund house and fund manager. Once you select a scheme, decide whether you want to go for the dividend or growth option. There is no difference in the tax treatment of the two options. The decision should be based on the cash-flow requirements of the investor. If you opt for the dividend option of the fund, you might get some portion of the money back within 1-2 months. Dividends from mutual funds are tax-free so there is no tax liability as well. Avoid the dividend reinvestment option for ELSS schemes because the lock-in period will prevent you from exiting fully.
Though the ELSS funds invest in equities, they are different from other open-ended diversified equity funds. Due to the lock-in period, the ELSS fund manager does not have to worry about redemption pressure from investors. This gives him the freedom to invest in shares as per his conviction and hold them for longer periods.
In the past few years, the ELSS category has consistently outperformed the large and midcap sub-category of diversified equity funds (see graphic).

ELSS funds offer tremendous flexibility to investors. As mentioned earlier, the 3-year lock-in period is the shortest. Since there is no tax on gains from equity funds after a year, an investor can safely recycle his investments every three years and claim tax benefits on the reinvested amount.
Young taxpayers, who have taken huge loans and don't have enough surplus to save tax, will find these schemes very useful. If you can help it, don't exit the scheme after three years just because lock-in period is over. Studies show that equities give better returns in the long term. The minimum investment is also very low.
Though regular equity mutual funds have a minimum investment of Rs 5,000, you can put in as little as Rs 500 in an ELSS scheme. Unlike a Ulip, pension plan or an insurance policy, there is no compulsion to continue investments in subsequent years. Since ELSS funds are a high-risk investment and their NAVs are volatile, you need to stagger your investment over a period of time instead of going for a lump-sum investment at the end of the financial year. This is more important at this juncture when the benchmark indices are trading close to their all-time high levels.
Your best option is to take the SIP route. This may not be possible now because you have less than three months before the 31 March deadline. At best, you can split the investment into three tranches. Before you take the plunge, remember that your investment should be guided by your overall asset allocation. If your exposure to equities is lower than what you want, go for the ELSS fund. If your portfolio already has too much equity, avoid investing in these funds.
BRIGHT IDEA: Don't invest a lump sum. Split investments in ELSS funds into three SIPs starting from January till March.
RGESS: An avoidable option for the first-time equity investors
The RGESS allows first-time equity investors earning up to Rs 12 lakh a year additional tax savings under the newly introduced Section 80 CCG. If you invest in the RGESS options, you can claim a deduction of 50 per cent of the invested amount. The maximum investment is Rs 50,000, so the maximum deduction availed of can be Rs 25,000. This is over and above the Rs 1 lakh limit available under Section 80C.
The scheme permits investments in the BSE-100 or CNX 100 shares, shares of Maharatna, Navratna or Miniratna PSUs, or in designated equity mutual funds and ETFs. Should you invest in it to avail of this benefit? We would not advise investing directly in shares just to claim tax deduction. In fact, the first-time investors are better off taking the mutual fund route.
If you do opt for any RGESS fund or ETF, your investment is locked in for three years (fixed lock-in period during the first year, followed by a flexible lock-in period for the two subsequent years). Under the flexible lock-in option, you are allowed to sell your RGESS shares or mutual funds units and reinvest the proceeds in any other RGESS instrument. This will enable you to get rid of the underperforming investments and shift to better options. However, in the absence of an SIP facility, you are exposed to market timing.
Also, the maximum tax saving you can get through this scheme is Rs 7,725 for those in the 30 per cent income tax bracket. In the 20 per cent bracket, the maximum saving is Rs 5,150, while you save only Rs 2,575 in the 10 per cent bracket. This is not much considering the risk you are taking by investing in equities. Besides, investors will also need to open a demat account to invest in the RGESS, which would incur annual charges.

RETURNS: 7.2-11.8 per cent (Past five years)
Don't go by the past record. The new Ulip is a good way to invest in the equity and debt markets for tax-free returns.
There's a good reason why this most hated investment is so high on our rating scale. For many policyholders, Ulips denote the costly mistake they made a few years ago. But that was a different era, when companies were gobbling up 50-60 per cent of the premium in the first few years in the guise of charges.
The 2010 guidelines have reformed the Ulip, turning it into a more customer-friendly investment. Though a Ulip should not be your first insurance policy, you can consider buying one as an investment that also helps you save tax. Of course, it also offers a life cover, but the stress is on investment, not protection. Don't buy a Ulip (or any other insurance policy, for that matter) if you are not sure whether you can continue paying the premium for the entire term. If you end it prematurely, be ready to pay surrender charges.
Your insurance policy should not impinge on other financial commitments. It's easy to set aside a big sum when you are young because your liabilities are limited, but this changes and expenses shoot up when you start a family or buy assets. If the premium is very high, the policyholder may find it difficult to pay it year after year.
Under the new Ulip rules, you cannot take a premium holiday. If you stop paying the premium, the policy will be discontinued. Also, you need to take a long-term view when you buy an insurance plan. A Ulip will yield good results only if you hold it for at least 10-12 years. Before that, the plan may not be able to recover the charges levied in the first few years. This is why short-term plans of 5-10 years usually give poor results, which pushes investors to dump them within 3-4 years of buying.

Buyers must also understand that a Ulip is not necessarily an equity-linked investment. You can also invest your Ulip corpus in debt funds. Right now, debt funds are looking attractive because of the possibility of a drop in bond yields, while the equity markets are looking overheated. Instead of investing in the equity option, put your corpus in the debt fund.
You can start shifting the money to the equity fund when the prospects look rosier. Only a Ulip allows you to switch from debt to equity, or vice versa, without incurring any capital gains tax. It is best to invest in a plain vanilla Ulip that allows you to choose your investment mix and also offers online transaction facilities.
BRIGHT IDEA: Opt for the liquid or debt fund and then shift to the equity option as per your reading of the market.

RETURNS: 8.5 per cent (for 2013-14)
This little used option is available only to salaried taxpayers covered by the Employees' Provident Fund.
The contribution to the Employees' Provident Fund (EPF) is a compulsory deduction, as also an automatic tax saver. However, you can contribute more than 12 per cent of your basic salary that flows into the EPF every month. This voluntary contribution will earn the same rate of interest, will fetch you the same tax benefits under Section 80C and the maturity corpus will also be tax-free.

A key disadvantage is the limited liquidity that the Provident Fund offers. You cannot access the money till you retire. A one-time withdrawal is allowed in special circumstances, such as medical emergency, purchase or construction of a house, or a child's marriage. However, it may not be possible to opt for the VPF at this juncture.
Companies typically ask their employees to submit the VPF mandate at the beginning of the financial year. Ask your company if you can start contributing to the VPF from this month onwards. Once you have opted for the deduction, you cannot discontinue it till the end of the financial year, except in extraordinary circumstances. While the VPF gets tax deduction and the maturity corpus is also tax-free, you will have to pay tax on the interest if you withdraw the money within five years. So, opt for it only if you are sure that you can remain invested for the long term.
Another drawback is the possibility of a lower interest rate for the PF in the coming years. The rate is announced by the EPFO Trust after examining the interest earned by the EPF corpus. It is likely to be 8.5 per cent for the current financial year, but there is no certainty that this will be maintained over the longer term.
Contributing to the VPF is suitable for taxpayers in their 50s, who want to aggressively save for their retirement but don't want to invest in market-linked options or tax-inefficient fixed deposits.
BRIGHT IDEA: Channelise at least 10 per cent of your increment to the VPF every year. The higher savings will not pinch you.

RETURNS: 9.2 per cent (for 2013-14)
This remains the best way for retirees to save tax, though the Rs 15 lakh investment limit is a damper.
With four stars, this assured return scheme is the best tax-saving avenue for senior citizens. However, the Rs 15 lakh investment limit somewhat curtails its utility as a tax-saving option. The interest rate is 100 basis points above the 5-year government bond yield.
Unlike the PPF, the change in interest rate does not affect the existing investments. This year, the interest rate has been cut by a marginal 10 basis points to 9.2 per cent. Many grey-haired investors may not be enthused by this. Banks are offering up to 10 per cent to senior citizens right now, almost 50-60 basis points higher than what they give to regular customers.
There's a good reason for this pampering. Senior citizens have a bulk of their investments in fixed deposits, which makes them prized customers for banks. So, if you do not consider the tax deduction under Section 80C, this option is not as lucrative as bank FDs. However, as a tax-saving tool, the scheme scores over bank fixed deposits and NSCs because the quarterly payment of the interest provides liquidity to the investor. The interest is paid on 31 March, 30 June, 30 September and 31 December, irrespective of when you start investing.

This aspect of the SCSS, and the fact that it is an ultra safe scheme backed by the government, makes it an ideal option for retired taxpayers looking for a steady stream of income. Though the interest earned is fully taxable, retired people usually don't have a high tax liability. Keep in mind that the basic tax exemption for senior citizens is higher at Rs 2.5 lakh. For very senior citizens, it is even higher at Rs 5 lakh.
The only glitch is the Rs 15 lakh investment limit per individual. If a person parks Rs 15 lakh of his retiral benefits in the scheme, he will be able to claim deduction for only Rs 1 lakh. Although the scheme is for senior citizens (60 years), even those above 55 years can invest if they have taken voluntary retirement. Retired defence personnel can join irrespective of their age if they fulfil other conditions.
BRIGHT IDEA: If you have Rs 15 lakh to invest in the scheme, stagger the investments over 2-3 years to claim more tax benefits.

RETURNS: 4.2-10.2 per cent (past 3 years)
The low-cost retire
ment product is a good option fro those saving for retirement, but watch out for the limited liquidity it offers.
Its low-cost structure, flexibility and other investor-friendly features make the New Pension Scheme an ideal investment vehicle for retirement planning. However, even though the fund management charges have been raised from the ridiculously unviable 0.0009 per cent to a more reasonable 0.25 per cent, the pension fund managers are not hardselling the scheme.
If you want to save tax through the NPS this year, be ready to do a lot of legwork and paperwork before you can get to invest in this unique pension plan. The returns from the NPS funds are a mixed bag (see table)
While the returns from the E class (equity) funds are in line with the market returns, those from the G class (gilt) funds are quite a disappointment. Government employees, who have a chunk of their pension funds in the G class schemes of LIC Pension Funds and SBI Pension Funds, would be especially hit. The redeeming feature is the high returns churned out by the C class (corporate bond) funds. However, these bonds carry a higher risk.
The scheme scores high on flexibility. The minimum annual contribution is Rs 6,000, which can be invested as a lump sum or in instalments of at least Rs 500. There is no upper limit. The investor also decides the percentage of the corpus that goes into equity, corporate bonds and government securities, the only limitation being the 50 per cent cap on exposure to equity
One of the most outstanding features of the NPS is the 'lifecycle fund'. It is meant for those who are not financially aware or can't manage their asset allocation themselves. It is also the default option for someone who has not indicated the desired allocation for his investments. Under this option, the investor's age decides the equity exposure. The 50 per cent allocation to equity is reduced every year by 2 per cent after the investor turns 35, till it comes down to 10 per cent. This is in keeping with the strategy to opt for a higher-risk, higher-return portfolio mix earlier in life, when there is ample time to make up for any possible black swan event.

Gradually, as the investor approaches retirement, he moves to a more stable fixed-return, low-risk portfolio. This automatic rejigging of the asset allocation is a unique feature of the NPS. No other pension plan or asset allocation mutual fund offers such a facility to investors. There are a few funds based on age, but they are one-size-fits-all solutions, not customised to the individual's age.
Another positive feature of the NPS is the wide choice of funds for the investor. Though you can switch from one fund manager to the other only once in a year, it is still better than investing in a Ulip or a pension plan where you are stuck with the same fund manager for the rest of the tenure. IDFC Pension Fund quit the NPS last year, but two well-regarded entities — HDFC Pension Fund and DSP Blackrock Pension Fund — have joined the club.
Another unique feature of the NPS is the tax benefit it offers under the newly added Section 80 CCD(2). Under this section, if an employer contributes 10 per cent of the salary (basic salary plus dearness allowance) to the NPS account of the employee, the amount gets tax exemption of up to Rs 1 lakh. This is over and above the Rs 1 lakh tax deduction under Section 80C. It's a win-win situation for both because the employer also gets tax benefit under Section 36 I (IV) A for his contribution.
By putting in money in the NPS, the employer can provide an additional tax benefit to the employee by simply reorganising the salary structure without incurring any additional cost to the company (CTC). The wart in the NPS is the lack of liquidity. You cannot access the funds before you turn 60. On maturity, at least 40 per cent of the corpus must be used to buy an annuity. Some see this as a positive feature that prevents premature withdrawals.
BRIGHT IDEA: Get your company to opt for the Section 80CCD(2), under which you can save more tax trhough the NPS.


RETURNS: 8.5-9.75 per cent
They appear attractive, but taxability of income takes away some of the sheen from these instruments.
There are many misconceptions about bank fixed deposits in the minds of investors. Many think that up to Rs 10,000 interest from bank deposits is tax-free, as announced in the budget two years ago. This is not true. The newly introduced Section 80TTA gives a deduction of up to Rs 10,000 on interest earned in the savings bank account, not on fixed deposits and recurring deposits.

Also, the nomenclature 'tax-saving deposits' means you save tax under Section 80C. It does not mean that these deposits are tax-free. The interest earned on deposits is fully taxable at the normal tax rate applicable to you. You have to mention this interest under the head 'Income from other sources' in your income tax return. Keep in mind that this tax is payable every year on the interest that accrues in that financial year, even though you get the amount on maturity.
So don't get misled by the high interest rates offered on the 5-year bank fixed deposits. The post-tax yield may not be as high as you think. In the 20 per cent and 30 per cent income tax brackets, it is not as attractive as the yield of the tax-free PPF.
The second misconception is that there is no need to pay tax if TDS has been deducted by the bank. You may have to pay tax even if TDS has been deducted. TDS is only 10 per cent (20 per cent if you haven't submitted your PAN details), and if you are in the 20-30 per cent bracket, you need to pay additional tax. Ignore mentioning the interest income in your return at your peril. The TDS is credited to your PAN and reported to the tax authorities. If there is a mismatch in the TDS details in the tax records and in your return, you will surely get a tax notice
The Central Board of Direct Taxes has a computer-aided scrutiny system (CASS), which flags any discrepancy in the tax return filed. Check the TDS in your Form 26AS, which has details of the tax deducted on your behalf. It can be easily checked online. It is easier if you have a Net banking account with any of the 35 banks that offer this facility. Otherwise, you can go to the official website of the Income Tax Department and click on 'View your tax credit'. The first-time users will have to register, but it takes less than 5 minutes to log on and view your details.
The interest on NSCs is also taxable but very few taxpayers include it in their returns. However, with the integration of tax records, a taxpayer may not be able to escape the tax net easily. For instance, if you have claimed tax deduction under Section 80C for investments in NSCs or FDs in one year, the tax department may want to know why the interest earned is not reflecting in your tax returns for subsequent years.
BRIGHT IDEA: Don't try to avoid the TDS by investing in FDs of different banks. You will have to pay the tax later anyway.

RETURNS: 5.5-7.5 per cent
Despite the revised guidelines, insurance plans are still not a good investment. Only HNI investors will find the tax-free corpus appealing.
Though the Irda guidelines for traditional plans have made insurance policies more customer-friendly by ensuring a higher surrender value and larger life covers, they are still the worst way to save tax. The tax saving is only meant to reduce the cost of insurance. It is not the core objective of the policy. Money-back and endowment insurance policies score low on the flexibility scale. Once you buy a policy, you are supposed to keep paying the premium for the rest of the term. This can be a problem if you took the policy only to save tax.
However, these policies are not as illiquid as they appear. You can easily get a loan against your endowment policy from the LIC. The terms are quite lenient and repayment can be done at your convenience. Insurance companies claim their products offer the triple advantage of life cover, long-term savings and tax benefits. That's not true. Traditional plans give a low life cover of 10 times the premium.
For a cover of Rs 25 lakh, you will have to spend Rs 2.5 lakh a year. They also give niggardly returns. The internal rate of return (IRR) for a 10-year policy comes to around 5.75 per cent. For longer terms of 15-20 years, the IRR is better at 6.5-7.5 per cent. As for the tax benefit, there are simpler and more cost-effective ways to save tax, such as 5-year bank FDs and NSCs. If the taxability of the income worries you, go for the tax-free PPF.
However, traditional insurance policies still make a lot of sense for the HNI investor who is more concerned about the tax--free corpus under Section 10(10d) than the deduction under Section 80C. Even for such investors, a Ulip will make more sense as they will have control over the investment mix. The opacity of the traditional plan is best avoided, but your agent might not be very keen to sell you a Ulip this year because his commission has been cut to 6-7 per cent of the premium.

RETURNS: 7-10 per cent
After a hiatus of 2-3 years, pension plans are making a comeback, but the high charges mean lower returns for investors.
Pension plans offered by life insurance companies made a comeback in 2013. However, the charges of these plans are significantly higher than those of the NPS. While the NPS has a fund management charge of 0.25 per cent, a typical pension plan from a life insurance company charges almost 3-4 per cent. This difference can snowball into a wide gap over the long term, reducing the returns of the pension plan investor by a significant margin.
Insurers argue that the low-cost NPS is good only on paper because there are so many hurdles to investing in the scheme. A pension plan from an insurer is costlier but you don't have to go around in circles trying to invest in it. That's true to a great extent. Even after four years of launch and offering additional tax benefits, the NPS has not been able to attract investors in hordes. However, the solution is not a high-cost pension plan.
A few mutual funds also have pension plans. The Templeton India Pension Plan is one of the oldest schemes in the market and offers deduction under Section 80C. It is a debt-oriented fund that invests 30-40 per cent of its corpus in equities and the rest in debt. But at 10.7 per cent, its 5-year annualised returns are nothing to gloat about. A better option would be a combination of an ELSS scheme and any of the debt instruments that offer tax deduction.
BRIGHT IDEA: It is not a good idea to invest a large sum in the equity option at one go. Opt for the liquid or debt fund instead.


Want to withdraw from your provident fund account? Here's how!

A provident fund (PF) is basically a plan to provide financial security after retirement. It is, therefore, not advisable to withdraw any amount from one's provident fund account as PFs are primarily meant for retirement planning, and retirement planning is the most important goal in any person's life.
"No need to say one should avoid doing so unless there is a great emergency, as the amount should be utilized post one retires or in case one stops working and his/ her earnings have depleted. For other emergencies, one should look at money from investments in other instruments like debt funds, liquid funds or a savings bank account, etc," suggests Anil Chopra, Group CEO, Bajaj Capital.
In fact, there are various advantages of investing in a provident fund (PF). Generally, the return on provident fund is higher than inflation, and is totally tax fee. Thus, withdrawing out of it would have the following consequences:
1) Retirement planning would go haywire
2) Tax-free status would be lost because that money cannot be put back. For example, let's say, someone has a balance of Rs 50 lakh in his provident fund account, and he wishes to withdraw Rs 25 lakh out of that. This amount of Rs 25 lakh cannot be put back into it later, as it is not allowed as per rules.
Therefore, "withdrawal from a PF account is generally discouraged, as the purpose of opening it and accumulating money there is mainly for the second innings of your life, which is post retirement," says Chopra.
Nitin Vyakaranam, Founder & CEO,, is of similar opinion. "Withdrawing PF stands out as the classic case of lack of prioritization and holistic approach in our financial decision making process. By making withdrawals from the PF to fund other goals, we end up pushing our retirement age or making higher contributions towards building retirement fund during the last few years of our employment," he says.
However, in case one wants to withdraw money from his/ her PF account, the rules for the same are very stringent, which also vary as per the types of provident funds. In India PFs are of three kinds:
a) Public Provident Fund (PPF) - For general public
b) Employees Provident Fund (EPF) - For private sector employees
C) General Provident Fund (GPF) - For government sector employees
In case of PPF, which is normally meant for 15 years, withdrawal is allowed before that also, but under very stringent norms. For example, no amount can be withdrawn at all for the first six years. After six years, the amount equivalent to 50 per cent of the balance, which was there more than 3 years ago, can be withdrawn. Thus, the entire money cannot be withdrawn before the end of 15 years. Even after 15 years, it can be rolled over for another period of 5 years and after that every five years it can be rolled over or closed.
Similarly, in case of EPF or GPF, withdrawal is not allowed generally unless one has given up working or wants to be self-employed, etc. As per EPF rules, you are allowed to withdraw money only if you have no job at the time of withdrawing your fund and if 2 months have passed. Only transfer is allowed in case you have switched to a new job. Some people, however, withdraw the EPF after 60 days of leaving the organization, stating that they don't have any job, but this is illegal as per the EPF rules, if you are doing so after switching to a new job.

Thus, if you have no job at the time of withdrawing your fund and if 2 months have passed after leaving your organisation, then you are allowed to withdraw the fund. A declaration is required to be given stating the reason for the same. Otherwise, partial withdrawal is allowed in certain cases, which is in the form of loan, where one has to pay back that amount later and before that, has to state the reason for opting for withdrawal, for example, self or daughter's marriage, buying a home, education of self or children, medical treatment for self or family, among others.
There are certain specified criteria under which partial withdrawal is permitted. In case of education or marriage, for instance, the employee should have completed at least 7 years of employment or service. The maximum aggregate withdrawal can't exceed 50 per cent of the total contributions made by you and withdrawal can be made only thrice during a person's total service tenure. Proof of education or wedding is also required to be submitted.
Likewise withdrawal is permitted for medical treatment of self, spouse, parents and children. In this case, however, there is no restriction regarding the number of years of service. But the maximum amount one can withdraw is six times the basic salary and proof of hospitalization is required.