What is ULIP?
Insurance plans are meant to provide financial security to you so that in case of premature demise, your family does not face any financial trouble. Though insurance plans provide unmatched financial security, many individuals also seek good investment returns on their premiums. Keeping this sentiment in mind, ULIPs were launched in the year 2000 when private life insurers were also allowed to operate in the insurance domain. Today, ULIPs have become quite popular, and insurance companies are offering different types of ULIPs to their customers. Let’s understand ULIP meaning in detail and its benefits –
What is a ULIP plan?
ULIP’s full form is Unit Linked Insurance Plan. A ULIP is an investment-oriented life insurance plan. The plan gives you the dual benefits of investment returns and insurance coverage. The premiums that you pay for the plan are invested in market-linked investment funds, which offer attractive growth. Returns under ULIPs are, therefore, not guaranteed but can be attractive if given time.
How do ULIPs work?
ULIPs are considered to be a transparent insurance plan as the premiums you pay, and the growth can be easily monitored. When you buy a ULIP, you can decide the amount of premium you wish to pay (provided it is at least the minimum required premium under the plan). The sum assured is then calculated based on the amount of premium paid.
ULIPs have different kinds of investment funds which include the following –
- Equity fund wherein at least 65% of the portfolio is invested in equity-oriented securities
- Debt fund wherein at least 65% of the portfolio is invested in debt-oriented securities
- Balanced fund which combines both equity and debt investments for moderate risks and moderate returns
You can choose one or more of these investment funds as per your risk appetite. After that, relevant charges are deducted from the premium, and the premium is directed towards the selected fund. As the value of the underlying assets grows, the value of the fund grows. Your investment in the fund also grows, and you get market-linked returns. ULIPs also provide you with various flexible benefits which are as follows –
- Switching – under switching, you can change the investment funds if your investment preference has changed
- Partial withdrawal – you are allowed the flexibility of withdrawing from your fund value partially after the first five years of the policy have expired
- Top-ups – additional investments can be done towards the plan through top-up premiums
- Premium redirection – you can choose to redirect your subsequent premiums to another fund from the next policy year under this facility
- Surrender of the plan – if the first five years of the policy have been completed, you can surrender your policy to terminate the coverage before the chosen term. When the policy is surrendered, the available fund value is paid as surrender value, and the plan is terminated.
Benefits payable under ULIPs
Under most unit-linked plans, you get either a death benefit or a maturity benefit. These benefits are as follows –
- Death benefit – the death benefit is higher of the available fund value as on the date of death or the sum assured. If the fund value is higher than the sum assured, the fund value is paid otherwise, the sum assured is paid.
- Maturity benefit – when the term of the plan comes to an end, the fund value is paid as maturity benefit. The maturity benefit can be taken in a lump sum, or you can also avail the benefit in instalments over the next five years through the settlement option feature, which is available under most unit-linked plans.
Types of ULIPs
Though ULIPs are aimed at creating wealth, there are different types of ULIPs based on the financial goal that they fulfil. These types include the following –
- Investment ULIPs
Investment ULIPs are the most common unit-linked plans which aim to create wealth over the term of the policy.
- Child ULIPs
Child ULIPs are especially designed unit-linked plans for the financial security of the child if the parent is not around. Under these plans, the parent is insured while the child is the beneficiary. These plans have an inbuilt premium waiver rider. If the parent dies during the policy tenure, the death benefit is paid. However, the plan does not terminate. The policy continues, and future premiums are paid by the company on behalf of the insured parent. On maturity of the policy, the fund value is again paid as the maturity benefit which provides the child with the financial corpus needed to pursue his/her dreams.
- Pension ULIPs
These are other specific unit-linked plans which help in creating a retirement fund. Pension ULIPs are deferred annuity plans wherein you pay premiums during the policy tenure to build up a retirement corpus. In case of death, the death benefit is paid. However, if the policy matures, pension ULIPs allow you to receive annuity pay-outs from the corpus created or defer the vesting age from which you would receive an annuity, or withdraw 1/3rd of the corpus in cash and use the remaining fund value to receive annuity payments. Thus, pension ULIPs create a source of income after retirement and are suitable for individuals looking to fulfil their retirement planning needs.
Benefits of ULIP
A ULIP is popular because of the following benefits it provides –
- It allows you to avail insurance coverage as well as investment returns in a single product
- The premiums paid and the benefits received under ULIPs are completely tax-free in nature helping you save tax
- The flexible benefits of ULIPs allow you to manage your investments as per your investment strategy
- The different types of ULIPs help you fulfil the various financial goals that you might have
- Switching and partial withdrawals do not attract any tax making ULIPs tax efficient
- Since the returns are market-linked, you get inflation-adjusted returns from ULIP
ULIPs are attractive insurance policies that give you coverage as well as returns. Now that you understand ULIP meaning, its types and advantages, use our IndiaNivesh platform to invest in a plan as per your insurance and investment needs and enjoy all the benefits that the plan has to offer.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
What is Side Pocketing, and How it affects Mutual Funds? The mutual fund industry in India is growing at an exponential pace, and as an industry, it is continuously widening its investor base and also increasing its geographical spread. The market regulator SEBI plays an important role in the regulation of the mutual fund industry, protecting the interest of investors at all times and taking adequate measures as and when needed to boost investor confidence in both equity and debt mutual fund schemes. Side pocketing in mutual funds is one such measure taken by SEBI to protect the interest of investors in debt mutual fund schemes in case of troublesome debt in the portfolio of the scheme. What is side pocketing in mutual funds? Side pocketing in mutual funds is the creation of a separate portfolio within the fund’s portfolio for assets that are illiquid, risky or distressed at the moment and have been downgraded by rating agencies below investment grade. Such assets are ring-fenced from the other high quality, liquid assets in the portfolio to protect and treated differently for investment and redemption to safeguard the interest of old as well as new investors in the scheme. Side pocketing was introduced by SEBI in December 2018 after the IL&FS fiasco, where it failed to meet its debt obligations and repay its lenders and creditors. This, in turn, put significant pressure on various mutual fund schemes that had IL&FS papers as a part of its holdings. The complete mayhem resulted in substantial volatility in the debt and money market instruments resulting in redemption pressure in mutual fund schemes. High-quality, liquid assets in the schemes were sold by the funds to meet redemption requests resulting in increasing the exposure of remaining investors in the illiquid assets. Side pocketing mechanism is allowed only in debt mutual fund schemes. How does it side pocketing work? Whenever a debt instrument is downgraded by credit rating agency from an investment grade to a non- investment grade, the mutual funds have an option for creating a side pocket and segregating illiquid assets from the high-quality liquid assets. The existing investors are allotted units in the leading portfolio and segregated portfolio on a pro-rata basis. No redemption and subscription are allowed in the segregated portfolio. Moreover, SEBI makes it mandatory for the fund to list the segregated portfolio on the stock exchange within 10 days to provide an exit window to the existing unitholders. Depending upon their outlook, investors can either continue to hold their investment in the segregated portfolio or choose to exit at the prevailing rate. Any future recovery from the illiquid assets is credited in the side pocket portfolio and paid to the unit holder in proportion to his holdings. Side pocketing impact on mutual funds and AMCs Side pocketing aids mutual fund schemes from selling quality assets in its portfolio to meet sudden redemption pressure in a panic situation. Creation of side pockets help insulate the remaining portfolio from troublesome debt To ensure that mutual funds do not misuse side pocketing, SEBI also suggests a list of safeguards that AMCs may implement. Benefits of side pocketing in mutual funds Over the last few months, many debt mutual fund schemes have side pocketing a portion of its portfolio if the ratings of the investment paper in its holdings have been downgraded by the credit rating agency. Side pocketing is important to protect the interest of retail investors in case of illiquid assets because credit defaults accompanied by information asymmetry, results in institutional investors taking advantage of the situation. The benefits of side pocketing in mutual funds include- It is an important mechanism to ensure stability and reduce volatility in the debt market by addressing the issue of redemption pressure in case of troubled assets It prevents distressed assets from hampering the returns generated by high quality, liquid assets At the time of selling the segregated assets, only those investors who have units in segregated assets on the record date are entitled to the proceeds, thus ensuring a fair treatment To avoid unfair advantage of lower valuation, fresh inflows are allowed only in the non-side pocketed portfolio As side-pocketing helps curb redemptions, it helps in stabilizing the net asset value (NAV) of the scheme In case of a situation arising due to sudden illiquidity, it provides cushioning to the portfolio. The most significant benefit of side pocketing is that all investors, retail or institutional are treated at par CONCLUSION Globally, side pocketing is one of the best mechanisms to protect the interest of investors, and SEBI as a regulator ensures that it takes timely measures and imposes adequate regulations for the AMCs to safeguard the interest of investors at large. If you have any specific query or doubt about side pocketing in mutual funds schemes, contact our experts at IndiaNivesh for guidance. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Introduction Most taxpaying individuals seem to view filing income tax returns as burdensome and a hassle. However, filing income tax returns is no longer cumbersome like it used to be. With the advent of the online filing, also known as e-filing, the days of standing in long queues and the endless anxiety of meeting the tax filing deadlines are far behind. Today, you can conveniently file your returns from your home or workplace in a matter of minutes. But delaying or missing out on registering your ITR in time could incur substantial penalties. Importance of filing on time Taxpayers typically receive notifications from the Income Tax Department regarding necessary income tax-related days in advance. In order to avoid paying the income tax penalty for late filing of your income tax returns, it can help to create an alert for such dates or mark them on your calendar. Filing your income tax returns comes with specific advantages such as carrying forward of losses, claiming an income tax refund, reporting one's revenue or income for the financial year and avoiding paying penalties. Any returns filed after the deadline usually calls for late payment fees of up to ₹10,000. The need to file Income Tax Returns As a taxpayer, you are called to declare your revenue, tax deductions, investments, expenses and taxes through a form to submit to the Income Tax Department. Under the Income Tax Act, 1961, it is mandatory for every taxpayer to file income tax returns. The facility of filing taxes can now be done online, and hence it is crucial to have necessary documents at the time of filing returns. Understanding penalties As a taxpayer, the penalty for late filing of income tax return could be: ₹5000 if income tax returns are filed after the deadline of the relevant Assessment Year. In this case, on or before December 31 of the relevant Assessment Year. ₹10,000 if income tax returns are filed after the deadline but before the end of the relevant Assessment Year. In this case, after December 31, 2019, but before March 31, 2020. If your cumulative income does not exceed ₹5 lakhs, you could be liable to pay ₹1000. The law of placing penalties for late filing of income tax returns was introduced in the Budget 2017, under Section 234F. It subsequently became valid for the Financial Year of 2017-18 or the Assessment Year 2018-19 and forward. The year that directly follows the Financial Year for which the ITR has to be filed is regarded as the Assessment Year. Hence, the Assessment Year for Financial Year 2018-19 is 2019-2020. Simplifying the Section 234f penalty through examples To understand how penalties can affect taxpayers, let's look at them through instances. Example 1: Say, Mr X earns a yearly income of ₹6 lakhs. If he files his income tax return for Assessment Year 2019-2020 on August 25, 2019, he will not be required to pay the penalty under Section 234F. This is because, since Mr X filed his income tax returns within the due date, he was saved from paying a late fee. Example 2: Mr A earning a yearly income of ₹7 lakhs filed his income tax return for Assessment Year 2019-2020 on November 10, 2019, would have to pay ₹5000 as penalty fee. This is because Mr A filed his income tax return after the due date, but before December 31, 2019. Example 3: Mr D earning an annual income of ₹5.5 lakhs filed his income tax return for Assessment Year 2019-2020 on February 2, 2020, he would have to pay a late penalty fee of ₹10,000. This is because, Mr D filed his income tax return after the due date and after December 31, 2019. Importance of filing taxes While paying taxes is essential, filing your tax return holds even greater importance. While there are numerous advantages of filing your returns within the permissible timeframe, the consequences of delaying them can prove to be expensive such as paying the penalties under Section 234f income tax. Hence, as a salaried individual, it is crucial to complete your tax return filing when you receive Form 16. By adhering to deadlines, there is no need to worry about late payment fees. Repercussions of delayed ITR returns If you delay filing your income tax returns, you may not be able to carry forward your losses from capital gains, except for losses from house properties. Besides, being late in filing your taxes could also incur interest on unpaid tax. In addition, not filing your tax returns on time could cause you to lose the interest on any refundable amount if you are eligible for refund and interest on that refund. Besides, if you fail to file your returns on or before the deadline, it could invite an additional interest of 1% per month or until the time you clear the amount on the unpaid taxes. The interest is applicable under section 234A of the Income Tax Act. For instance, the due date to file your income tax returns in a particular Financial Year is August 31, but you file your taxes on December 30. In this case, if your total outstanding is ₹1 lakh, having taken into account advance taxes and TDS, the total interest payable would be ₹4000, with interest charged at 1% for four months. However, in the event that you have to pay the fee under Section 234F, you need to apply Challan Code ITNS 280. To pay the penalty, the taxpayer must visit the NSDL website and select Challan ITNS 280. There are two ways to make late payment fees. It can be included as the total income tax due The amount can be mentioned under 'Other' head. Conclusion Ensure that you file your income tax returns by the due date if your revenue surpasses the exemption limit. It is crucial to file your income tax returns on time if you have to deposit balance tax, expect a significant refund amount or have to carry forward your losses. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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