We have always seen our parents quoting the example of our grandparents to emphasize on the significance of Savings. How their hard earned savings helped them and our parents survive is no hidden fact. Our forefathers, without a doubt, did a great job by efficiently juggling with expenses (child education, food, rents) and savings. The scenario now, unfortunately, has changed drastically. Savings in today’s times aren’t sufficient enough to take care of major expenses like Child education, purchase of house, a critical illness, various loans etc.In savings there is less profit making or creation of wealth (depending on the rate given in a savings account in a bank). In order to be able to handle those expenses, one has to look for alternate sources of income or something that transforms savings into wealth. That something is called Investment.

Investments simplify everything by reducing or rather eliminating the liabilities from our life. The below mentioned options would give you an insight into various kinds of investments that salaried person could go for.

ULIPS

A Unit Link Insurance Plan is a product that provides dual benefit of insurance and investment to the consumers. ULIPS are exclusively meant for investors who are open to risk as they are market linked. Some part of the premium paid is utilized to offer insurance cover to the policy holder while the remaining portion is invested in various equity and debt schemes. The allocated premiums are utilized to buy units as per the fund type based on the ongoing NAV. NAV is the per unit value of the scheme and is announced on a regular (daily) basis. It varies from one ULIP to another based on market conditions and the fund’s performance. Policy holders have the choice to opt for different types of funds (debt or equity) or a mix of both based on their ability to take risk. ULIP planshave some risks involved, therefore a salaried person should think wisely before opting for this investment option.

Types Of ULIPS:

Type-I ULIP:  In this plan, the policy gives the higher of the sum assured or the fund value of the investment as death benefit to nominees

Type-II ULIP: T he policy pays out both the sum assured and the fund value as death benefit to nominees. Premiums on such plans are higher than those on Type I UlipsTax Implications

Premiums paid towards a life insurance policy is eligible for tax deductions under Section 80C with a limit of 1 lakh in a financial year.

Traditional plans

As their name suggests, traditional plans unlike ULIPS invest all the funds in to Debt. A traditional life insurance policy clubs a life insurance cover with investment. It has a longer tenure with annual premiums – often for 15 years or more. A small part of your premium goes into covering for your life and is called mortality charge. The rest is put into debt. The emphasis is on covering risk and keeping the corpus safe.

Types of Traditional Plans:

Term Plans

Term insurance is the basic form of insurance as it provides risk cover in the exchange of yearly paid premiums. In the event of death of the policyholder, sum assured is paid out to the nominee. There is no survival benefit in term insurance. Amount paid out on the demise of insured is good enough to take care of all the expenses of their family. Besides offering protection, term plan also makes one eligible for tax deduction.A salaried employee with family responsibilities or loans must have this investment option to safeguard his family from any unforeseen situation.

Whole Life Plans:

Whole Life Plans are the ones which typically run till the insured is alive, irrespective of the premium payment term. On surviving the policy term, the maturity proceeds are paid and the Sum Assured is retained. This Sum assured is paid on demise of the policyholder to the nominee.

Endowment Plans:

Unlike the whole life plans, the tenure of policy in endowmlent plans is decided for a particular period say 15, 20, 25 or 30 years. In case of death of insured during the policy term the insurer settles the claim by paying Sum assured along with bonus. In case of survival, the policyholder receives guaranteed maturity benefits plus bonus announced by the insurance provider.

Money Back Policy:

Money back policy is meant for people who desire to receive regular payments. This policy is usually issued for a specific period, and the sum assured is paid periodically to the insured, during this time period. In case of unexpected demise of the policyholder before the maturity of the policy, full sum assured along with bonus is payable by the insurance provider to the nominee chosen by the insured.

Non-Risky Investment Options:

Investors who are allergic to risk or are risk averse could consider contributing their savings into these safe investment options. Returns are a little low but then they are guaranteed and risk free.

PPF/EPF

PPF, a statutory scheme by the central government, is meant for both salaried and self-employed individuals. It was initiated with the aim of offering old age financial security to self-employed individuals and workers from unorganized sectors.

EPF, on the other hand, is a financial aid for retirement designed exclusively for salaried employees. It is a fund to which both the employee and employer contribute 12 per cent (or the minimum of Rs 780) of the former’s basic salary amount every month.

PPF and EPF are eligible for tax exemption under Section 80C, which means there is no tax deduction on the maturity proceeds in these options.This is a must to have investment option for salaried person in private sectors.

Fixed Deposit

Fixed Deposit is a savings account or certificate of deposit that offers a fixed rate of interest until a specific maturity date. The interest earned on FD account is higher than the interest earned on savings account. Tax is deducted (TDS) by the banks on FDs if interest paid to a holder at any bank crosses Rs.10,000 in a financial year. This is called Tax deducted at source and is 10% of the interest.

However, tax to be deducted on interest from fixed deposits is not 10%; it is applicable at the rate of tax slab of the deposit holder.This investment option is one of the best for salaried person with medium income.

National Savings Certificate

National Savings Certificates also known as NSC is a saving bond, mainly used for small saving and income tax saving investment in India, part of the Postal Saving System of Indian Postal Service (India Post). These can be bought from a post office by an adult in his name or in the name of a minor, a trust, or two adults jointly. These are issued for five and ten year maturity and can be used as collateral for availing loans. The holder gets the tax benefit under section 80C of Income Tax act, 1961

MIS (Monthly Income Scheme)

Post Office Monthly Income Scheme provides you a guaranteed return on your investment. Investors interested in generating monthly income can sign up for this account and get an assured monthly income. You get 8% interest per year, which is payable on per month basis. You will receive interest each month from the date of making the investment, not from start of the month.

This post office saving scheme does not fall under sec 80C so there is no tax-exemption for the amount you invest in this, and interest income is taxable, but there is no Tax deduction on source in this scheme.This is a good option for salaried person with low to medium income per month.

Investment Options Involving Equity or Risk

Investors who expect to gain high returns and are open to taking risks could look at these equity/ market linked options. There is some contribution towards Debt but major contribution is towards equity only.

NPS

National Pension Scheme is a fixed contribution based pension system implemented by Government of India. This scheme allows the investor to contribute his funds towards both equity and debt. Investor is free to choose the percentage amount that has to go towards debt and equity as well. If he/she is unable to choose on his/her own then the age criteria is used to decide the investment allocation. Till 35 years of age, exposure to equity and debt is 50%. Post 35, after every 5 years equity investment reduces by 10%

A minimum investment of Rs.500 per month has to be done. On exiting the scheme before 60 years, 80% of the accumulated savings have to be used to buy life annuity from an IRDA regulated insurance provider. The remaining 20% only can be withdrawn as lump sum. If an investor exits the scheme after 60 years of age then 40% of accumulated savings have to be used to buy life annuity.

As per DTC (Direct taxes code) the withdrawn lump sum amount is tax exempted but the maturity proceeds from annuity get taxed.

Conclusion

Be very specific of your needs, your understanding about the instrument and your ability to take risks. A certain investment option might offer you decent returns but may not be eligible for tax deduction. If your requirement is tax deduction then choose products that help you save tax. If income is what you expect then invest in ULIPs or equity but keep the risks involved in your mind too. If you mean to protect your life then choose term insurance over all other products.

Reference: www.policybazaar.com

Vaibhav Bagga