Deferred payout from insurance plans is tax free: Should you invest in these plans?
Though deferred insurance payout plans are tax-free, investors should consider several other factors before investing in them.
The renewed interest in deferred payput plans is due the launch of Sanchay Plus by HDFC Life Insurance. Though competing products are already available in the market, Sanchay Plus got attention because the payments can be extended up to the age of 99.
“In addition to receiving regular income till the age of 99, the 6.3% annualised return being offered is the highest in the industry right now. However, other insurers may soon come up with competing products,” says Santosh Agarwal, Head of Life Insurance, Policybazaar.
Deferred payout plans are considered superior to annuities due to several reasons. First, the plans offer insurance cover, which annuity products do not. “The life cover offered during the premium paying term— usually till retirement—works in favour of the policyholder,” says Abhishek Mishra, CEO, Bonanza Insurance.
Secondly, annuity receipts are taxable, but receipts from deferred payout plans are not. This is because these plans have insurance cover and are tax free under Section 10 (10D) of the Income Tax Act. Since the rates of return offered by both are similar, the taxation differential makes deferred
payout products more attractive.
However, deferred payout plans don’t score too well when compared with some other products. Investors need to consider several factors before buying them.
How deferred payout plans stack up
Deferred payout plans are good for people who want guaranteed income over the long-term and are in the highest tax bracket even after retirement.
Using the deferred withdrawal facility for tax-free products like PPF is a good strategy. Though the PPF’s tenure is 15 years, investors can extend it by blocks of five years. Once you are done with investing, there is need to withdraw everything in one go. The maturity value can be retained without making any further deposits. The 8% interest earned on this accumulated value is better than the rates offered by bank FDs. However, as withdrawal is allowed only once a year, flexibility is an issue.
You can manage regular income and taxability issues by opting for systematic withdrawal plans from mutual funds. “Tax incidence will be low because capital gain from equity funds is tax free up to Rs 1 lakh per annum. Similarly, the LTCG tax on debt funds is also only 20% after indexation,” says Medury.
- Interest rate
Investors should note that while the current rates being offered by products like SCSS and PPF is high, they may fall in future. Returns generated by debt funds can also be lower. “The chances of interest rates going down in future is high. Hence, it makes sense to lock into current rates. Deferred payout options are useful for people who want fixed returns for the long term,” says Mishra.