NPS vs ULIP - Which is the Best?
Updated on: Jun 21st, 2024
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3 min read
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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. Don’t worry, we will help you with it.
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 regularly throughout their employment.
NPS is a market-linked scheme that generates healthy returns between 9% and 12% on the amount invested. At the time of retirement, subscribers may choose to withdraw a certain percentage of the corpus, and the remaining amount will be paid out as a monthly pension.
Understanding ULIPs
Unit-linked insurance Plans (ULIPs) combine insurance plans with 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 and the plan selected.
Comparison of NPS With ULIPs
The following table shows the comparison of NPS with ULIPs;
Parameters | NPS | ULIPs |
Cost | The cost of investing is not high. The management fee is limited to 0.25%. Recurring charges are also 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 | To receive a considerable pension when you retire, you must invest a minimum of Rs 1,000 in a year. | 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 25% of your contribution before you turn 60 years old.
Further, at the time of retirement, a maximum of 60% can be withdrawn from the corpus, and the balance is to be kept as an annuity. | ULIPs do not allow withdrawals, and payouts should occur only upon the policyholder's death or the ULIP's maturity. |
Taxation | The tax status of NPS is EET. i.e., (i) Tax Deduction will be available on initial investment. (ii) Yearly interest earned on NPS will not be taxable. (iii) The taxability will arise only at maturity on any sum withdrawn over and above 40% of the corpus amount. The interest earned on the amount contributed is not liable to tax. | Recent changes have occurred in the taxability of the maturity proceeds of ULIP, wherein the ULIP purchased after February 1, 2021, has an annual premium over Rs. 2.5 lakhs shall be taxable. |
Who Should Invest in NPS?
NPS is suitable for those looking for a monthly pension. Those planning for early retirement with a 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 a regular monthly pension.
Who Should Invest in ULIPs?
Investing in ULIPs is advisable for those with no insurance coverage who have not made any investments but have a high-risk appetite. The returns offered by ULIPs are higher than those on NPS, considering the benefit of the additional risk undertaken by the ULIP holder.
Final Word
Both NPS and ULIPs are tax-saving options covered under Section 80C of the Income Tax Act, 1961. If you don’t have insurance coverage or any tax-saving investments, you can invest in ULIPs. If you have insurance coverage provided by your employer or your own mediclaim, then you can invest in NPS; it is an excellent means to build a retirement corpus.
Frequently Asked Questions
Quick Summary
Unit Linked Insurance Plans (ULIPs) and the National Pension System (NPS) are compared in terms of cost, minimum contribution, withdrawals, and taxation benefits. NPS offers a monthly pension option while ULIPs combine insurance coverage with investments. NPS suits those seeking pension security, while ULIPs are for those with a higher risk appetite and no insurance coverage.
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