Guaranteed return plan – The Hindu

A decade ago, Sanjay, a salaried professional, locked his savings in a fixed deposit (FD). Last month, when it matured, he realised it did not really translate into what he expected. First, the maturity amount, when adjusted for tax and inflation, did not stretch as far as he had imagined. Second, he realised on account of lower interest rates, renewing FD meant much reduced returns in future. The plan did not deliver the financial milestone he was hoping for.

This is the story of millions of savers who are discovering that in today’s financial environment, safety alone is no longer enough. What people increasingly seek is not just protection of capital, but protection of purchasing power and long-term financial goals. And this is where guaranteed return plans are gaining relevance among new-age investors.

Certainty as financial priority

While the focus was on maximising returns a few years earlier, today, it is equally on ensuring consistency. This shift is driven by factors such as sliding interest rates, market volatility and high lifestyle inflation. In such an environment, certainty itself becomes valuable. Guaranteed return plans are built around delivering that certainty.

For decades, FDs served as the go-to option for investors who wished to play safe. However, they carry two structural limitations. First, FD interest is fully taxable, which reduces effective compounding over time. A seemingly competitive rate can translate into lower post-tax returns, especially over long horizons. Second, FDs expose investors to reinvestment risk. When FD matures, there is no certainty same rates will be available. This combination can gradually weaken long-term financial planning.

Guaranteed return plans

These plans are long-term insurance-linked savings products that combine wealth creation with life protection. The returns are fixed and assured at the time of purchase and once locked in, they are unchanged for the entire policy span. The returns are unaffected by market movements or interest-rate cycles.

This clarity allows people to plan life goals such as a child’s education, retirement income or financial security for the family. Currently, many guaranteed return plans offer returns up to 6.9-7%. The real USP of these plans lie in predictability as the returns do not fluctuate.

Also, maturity proceeds qualify for tax exemption under Section 10(10D), provided the aggregate annual premium across eligible policies don’t exceed ₹5 lakh. This helps preserve returns without tax erosion, boosting long-term compounding compared with fully-taxable instruments. Also, premiums paid qualify for deductions under Section 80C, which improves tax efficiency.

The compounding effect

Suppose A invests ₹24 lakh in a FD with 6% interest and Investor B the same amount in a guaranteed return plan offering 6.9% tax-free returns. At the end of 10 years, Investor A’s corpus would be much lower than Investor B’s even before maturity tax cut. And when you adjust for taxation, the effective amount reduces further. Basically, FD returns are added to the taxable income and taxed as per your income slab. So, for those in 30% tax slab, FD proceeds will also be taxed at 30%. Investor B’s maturity value, by contrast, stays largely preserved.

Securing dependents

Another feature is the built-in life cover in these plans. Guaranteed return plans include an insurance component providing financial protection to dependents. This dual structure of savings plus protection ensures that long-term goals remain safeguarded even in unforeseen circumstances even in the policyholder’s absence.

Guaranteed return plans are not for replacing other investments. Equity- based assets are crucial for long-term growth and inflation participation. However, guaranteed return plans serve the distinct role of anchoring a portfolio with predictability, tax efficiency and long-term certainty.

(The writer is Head, Investments, Policybazaar.com)