My Mistake: Buying a ULIP

A 5-year investment blunder

Photo by Helloquence on Unsplash

It was February of 2019. And the financial year was about to end. I knew the time was ticking. I wanted to save some tax under section 80C. I thought to buy an ELSS/Mutual Fund for the same. I called in my bank. I said I wanted to invest in a mutual fund. The bank executive came to my office and tried to sell me some 15 years investment plan. I could not withstand it. I said I just want to save tax and that is all. Already, I was investing in stocks. To grow my money I could better invest in stocks. Knowing my unwillingness towards a 15-year plan, he introduced me to:

ULIP

Unit linked Insurance Plan (in my opinion, jack of all trades master of none).

What will I get:

1. Sum insured money of 12 lacs if I die within 10 years.
2. Otherwise, after 10 years I will get Net Asset Value of the fund (similar to a mutual fund).

What will I give:

1. Every year 1.2 lac as an insurance premium for 5 years. (Total 6 lacs)

Why this was a mistake?

Already under Income Tax section 80C(capped up to 1.5lac ), the provident fund gets covered cause I am a salaried person. Initially, I had to pay approx 34 thousand yearly as PF contribution. Hence, I should have just gone for 1.16 lac yearly premium for tax saving. But, the executive said it was difficult to do that. So, I complied. I didn’t create a fuss about investing an extra 4 thousand yearly which wouldn’t come under tax exemption. But, But, But!!! I got a double-digit hike in the salary. So, the mandated amount of the PF contribution increased too in the same ratio. From the next year onwards, I was actually paying much more in the premium than what would be exempted. (You can claim only 1.5lac under 80C which also includes your PF).

Comparison of 2019 and 2020 salary component

Budget 2020

And the next thing you come to know is — our honourable Finance Minister comes up with a dual tax system.

Requesting you to take 10 seconds pause before reading ahead. I too took the pause while I wrote this.

10–9–8–7–6–5–4–3–2–1. Ok Done!

Under the new system, one could pay income tax at a lower rate if he/she doesn’t claim any tax exemptions. Wow! But, I was like — “How!!!” The new tax system was introduced to encourage people to spend more and give a boost to the sluggish economy. Either you invest or you spend, in both ways, you would pay the same income tax(subtle variation could occur based on your income type). The new system is good for people who do not plan to save their tax. Also, people can pay lower tax without being forced to do tax saving investment.

Learnings

1. I should have gone for ELSS. Under ELSS, your principal is locked down for 3 years. But, you are not ought to invest every year in the same amount. I could have also tweaked the amount to be invested under ELSS every year based on my PF contribution.
2. If only I knew that under new tax regime I am not ought to invest under section 80C to save tax, I would have never invested in Mutual Funds/ULIP/PPF. Stocks are giving me a decent return(risk is involved though). Moreover, I am free to sell any of my stocks position, in case a need arises. Still, I am not denying the fact that one should maintain an emergency fund in their saving accounts.
   I also have handsome float money due to credit cards(read the blog around the same here).
3. I really don’t need life insurance. My employer already covers me.
4. No one depends on me. Ok, this might not be 100% true. So as to clarify, no one depends on me for their bread and butter.

Conclusion

Do not postpone the tax planning to the end of the financial year. Otherwise, you are destined to commit an investment mistake in a hurry.