With the financial year drawing to an end, most individuals have already started their tax planning. Whereas some individuals depend on their CAs (chartered accountants) to plan their taxes, others take the initiative and do their tax planning themselves.

Saving instruments like PPF (public provident fund), National Saving Certificate (NSC) Safety bonds, Flexi bonds, tax-saving mutual funds and insurance offer tax benefits under Sec 88. All this time most investors preferred PPF and NSC for saving tax. But now with the opening of the insurance sector to private participants, insurance is fast emerging as a much better alternative for tax planning in terms of returns as well as security.

Insurance scores over other instruments highlighted above because it not only provides life cover and tax benefit under Sec 88, but also provides tax-free returns at the time of maturity or death (whichever is earlier).

Some insurance plans provide life cover while other plans (investment plans) provide an upfront insurance to the policyholder. For e.g. if a person wants to invest Rs 100,000 in Bima Nivesh of LIC or Single Premium Bond of HDFC Standard Life, he will pay just Rs 95,000 and the insurer will consider Rs 100,000 as the amount invested. This is because both these insurers offer an upfront insurance of 5% on their investments.

Whereas profit-linked insurance policies like endowment and money-back provide life cover in addition to tax benefits and tax-free returns, the investment bonds offered by insurers provide an upfront insurance in addition to tax benefits and tax-free returns. If planned properly, insurance can be a very powerful tool not only for tax planning but also for short-term needs and retirement.

Apart from returns, insurance also provides monetary protection to the family in the absence of its breadwinner and also provides the policyholder with some monetary benefits in case of a critical illness like kidney failure, stroke and heart attack.

In the current interest rate scenario, when fixed income instruments are witnessing lower yields, PPF and NSC have turned unattractive. These assured return products will be the worst hit as the Reserve Bank of India (RBI) prepares to sustain the current lower interest regime. In such a scenario, a single premium bond can be more rewarding in the long run. For instance, HDFC Standard Life has declared a bonus of 9.25% in the very first year on the single premium bond. This rate of return is linked to economic factors and is not an assured return. Investors need to understand that most (if not all) assured return products in the market today are unrealistic.

To know more about how Insurance can be used as a financial planning tool and how it can be designed to take care of most of the eventualities of life, please register here.

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