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Unit Linked Insurance Plans (ULIPs) and the National Pension System (NPS) are two of the most popular tax-saving options covered under Section 80C of the Income Tax Act, 1961. Taxpayers can save up to Rs 46,800 a year in taxes by investing in these schemes. With both ULIPs and NPS being tax-saving investment options, you might find it hard to compare and determine the best among the two. We have covered the following in the article, and this may help you in choosing the best option:

1.Understanding NPS

The National Pension Scheme (NPS) is a government pension scheme. Employees working in the government, private, public, and unorganised sectors can subscribe to this scheme. Those employed in the armed forces cannot invest in NPS. Individuals can invest a nominal sum at regular intervals over their course of employment. The subscribers may choose to withdraw a certain percentage of the corpus once they retire, and the remaining amount will be paid out as monthly pension.

2.Understanding ULIPs

Unit Linked Insurance Plans (ULIPs) are a combination of insurance plans and investments. The objective of a ULIP is to offer the opportunity for wealth growth alongside insurance coverage. The premium paid by the investors has two portions. The first portion goes towards the premium for the insurance coverage, and the rest goes towards investment. The investment will be made in debt or equity instruments, as per the risk profile of the investor.

3.Comparison of NPS With ULIPs

The following table shows the comparison of NPS with ULIPs;

 

Parameters NPS ULPP
Cost The cost that comes attached to investment in NPS is not high. The management fee is limited under 0.25%. There are no recurring charges imposed on NPS.  Since ULIPs invest in debt and equity instruments, the management fee is higher than that of NPS. It can go up to 1.35%.
Minimum contribution There is no minimum contribution required to be made, however, a minimum of Rs 1,000 must be invested to get a considerable amount as pension when you retire. Since ULIPs are insurance products, the premium payable will generally be fixed and you cannot pay less than that. Hence, the minimum contribution for ULIPs is higher than that of NPS.
Withdrawals No withdrawals are allowed. You must purchase an annuity at the end of the term of the ULIPs. You can withdraw a maximum of 20% of the corpus before you turn 60 years old.  ULIPs do not allow withdrawals, and you should mandatorily buy an annuity plan at the end of the term. You can withdraw up to 1/3rd of the corpus at the end of the term while the rest will go towards buying an annuity scheme.
Taxation The tax status of NPS is EET. The amount withdrawn at maturity is subject to taxation. The 1/3rd portion of the corpus accumulated withdrawn at maturity is taxable. 

4.Who Should Invest in NPS?

NPS is suitable for those who are looking for monthly pension. Those planning for early retirement and has low-risk appetite can invest in NPS. Salaried individuals with not enough Section 80C investments can also consider investing in NPS as it provides an excellent opportunity to save taxes and secure retired life in the form of regular monthly pension.

5.Who Should Invest in ULIPs?

Investing in ULIPs is advisable for those not having any insurance cover and have not made any investments. The returns offered by ULIPs may not be as high as NPS. This is because only some part of the premium paid for ULIPs go towards investment, while the rest goes towards availing insurance cover.

Both NPS and ULIPs are tax-saving options covered under Section 80C of the Income Tax Act, 1961. If you don’t have an insurance cover and any tax-saving investments, you can invest in ULIPs. If you have insurance cover offered by your employer or have your own mediclaim, then you can invest in NPS, it is an excellent means to build a retirement corpus.

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