_1609311026964_1609311043784_1641878630891.jpg "If the combined annual premium of Ulips bought after 1 February 2021 exceeds ₹2.5 lakh, gains from the Ulips will be taxed like equity funds. (Photo: Shutterstock)")
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I want to save for my 2-year-old daughter’s education. My bank's representative has suggested a children's Ulip, which will give me the triple benefits of tax deduction, tax-free maturity and life cover. The premium will be about ₹45,000. Do you think I should invest in this plan?
Name withheld
(Query answered by Raj Khosla, managing director, MyMoneyMantra.com)
You will certainly get triple benefits on this investment. However, there are certain features you should be aware of. For one, the life insurance cover offered by a Ulip is only 10 times the annual premium, which means you will get a cover of ₹4.5 lakh. This may not be sufficient for your family. Life cover should be at least 8-10 times your annual income. It is better to buy a term insurance plan, which can provide a large insurance cover at a relatively low price.
The premium you will pay is eligible for tax deduction under Section 80C. But other investment options can also be used for this purpose. For instance, ELSS funds have given very good returns till now and are a better investment option than a Ulip. ELSS funds have a short lock in period of three years.
It can be argued that gains of more than ₹1 lakh in a year from ELSS funds are taxable, while the Ulip corpus will be tax free on maturity under Sec 10(10d). But this rule was amended in 2021. If the combined annual premium of Ulips bought after 1 February 2021 exceeds ₹2.5 lakh, gains from the Ulips will be taxed like equity funds.
Also keep in mind that ELSS funds do not bind you into a multi-year investing commitment. If an ELSS fund does not do well, you can stop your SIPs and not buy that fund again. In a Ulip, an investor is stuck with the same funds and fund managers for the full term of the plan.
One positive feature of a Ulip is that the policyholder is allowed to make changes in the asset mix. Unlike an ELSS where investments can’t be touched till the lock-in period is over, Ulip investors can switch from an equity fund to a debt fund or liquid fund and vice versa. What’s more, the gains made from such switching are not taxable.
(Send queries and views to mintmoney@livemint.com.)
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