How to Make Tax Free Switches in ULIPs and NPS?

A Unit Linked Insurance Plan (ULIP) is essentially a market-linked investment product that also offers the benefit of a life insurance cover. Being a market-linked product, ULIP Plans let you invest across a wide range of investment funds ranging from pure equity to debt. Another unique feature of ULIPs is the option to switch between funds to ensure that you maintain your asset allocation as per your financial needs. The fund switch feature is also available for the National Pension System (NPS). What’s more, both ULIPs and NPS offer the freedom to switch without incurring any tax liabilities. In other words, switching is completely tax-free in both the products. Here’s how switching works for both ULIPs and NPS:

Tax-Free Switching in ULIPs

When you buy a ULIP plan, you are offered the option of investing in an array of funds. You can either choose to put all your money in one fund or distribute it across other different funds offered under the policy. If you are not happy with the performance of your present funds, you can switch to another fund offered by your ULIP provider. Most ULIPs providers offer a limited number of free switches in a year, after which you need to pay the applicable ULIP switching charges which are deducted from the fund value. The switching charges for ULIP can cost anywhere between ₹100 and ₹500 depending on the insurance providers. Some insurers may also require you to switch a minimum amount for it to be free.

Most insurers offer the provision to make a switch online by accessing your account through the user-ID and password or by filling up the switch form. Generally, if the request is processed before 3 PM, the insurer will switch the amount on the same day’s NAV, else NAV of the next working day will be taken into consideration.

Tax-Free Switching in NPS

The fund switching process in NPS varies slightly as the product construct of NPS works differently. NPS offers four different funds i.e. equity funds, which lets you invest up to 75% of your corpus, corporate bond fund, government securities fund and alternative asset class fund where you can’t invest more than 5% of the corpus. A total of eight fund managers offer each of these funds under NPS. You can initiate a tax-free switch between funds under the same fund manager up to the permissible limit specified under each fund.

If you make a switch online, there will be no charges or tax levied. On the other hand, if you make an offline switch, you will need to pay ₹ 20. Switching funds in NPS can take 2-3 days to complete as it doesn’t reach the fund manager immediately; it first goes to the central record keeping agency and then to the fund manager.