While looking for a long-term investment plan, the National Pension Plan & the Unit Linked Insurance Plan (ULIP) are one of the most common. Though both plans are made to fulfil the financial planning needs, which will let you ensure financial security. With the help of this article, you may get to understand the NPS & ULIPs, letting you evaluate which one best suits you.
What is NPS?
The National Pension Scheme, backed by the Government of India, offers financial security to individuals during their retirement years. This plan is meant for private, public, & unorganised sector employees, except for armed forces staff. This plan offers flexible investment options, tax benefits, & market-linked returns. Individuals can undertake retirement planning by investing funds regularly during their careers to build a corpus for a secure financial future.
What is ULIP?
Unit Linked Insurance Plan is a type of life insurance which it includes two components, namely insurance & investment. Under ULIP, a part of the premium is allocated towards life insurance & the rest towards investment. One can opt to invest in debt, equity, or both, depending upon the financial objectives & risk acceptance level, making it an ideal investment option. It provides flexibility to switch between the funds anytime during the policy tenure.
In case of the death of a policyholder, the nominees will receive the return on investment or the amount of sum assured, whichever is higher &, & if the policyholder survives the policy, they will receive the fund value.
Difference between NPS & ULIP
| Basis of Difference | NPS | ULIP |
| Cost | The investment cost is not higher, & the management fees are restricted to 0.25%. | The management fees under ULIPs are on the higher side, as high as 1.35%. |
| Minimum contribution | To receive a handsome amount post retirement, one must invest a minimum of INR 1000 annually. | Under this plan, the premium amount is fixed; hence, the minimum contribution remains high in comparison to NPS. |
| Withdrawals | This plan does not allow withdrawal of funds, but it allows 25% of the amount to be withdrawn before the age of 60 years. At the time of retirement, a further 60% can be withdrawn from the corpus amount, & the balance would be treated as an annuity. | Under this plan, the policyholder is not allowed to withdraw the funds. This means payouts will be made only on the policyholder’s death or when the plan matures. |
| Taxation | This plan comes under the taxability status of EET, which means:
i) The initial contribution made is exempt from the tax up to INR 1.5 lakhs u/s 80CCD (1). It includes an additional deduction of INR 50,000 u/s 80CCD (1B). ii) The interest earned will also be exempt from tax. iii) At the time of maturity, 60% of the corpus amount is exempt from tax. The remaining 40% must be used to purchase an annuity plan & any income thereon will be taxable as per the Income Tax slab. |
As per the latest amendments dated Feb 1, 2021, where the ULIPs bought with an annual premium amount above INR 2.5 lakhs will be held taxable. |
| Investment Options | It includes debt, equity, & government securities. | This plan provides an option to select among debt, equity, or balanced funds. |
Features & Benefits of National Pension Scheme (NPS)
- Flexibility
It offers flexibility in the selection of tenure & amount according to the financial objectives & risk appetite.
- Regulated
The National Pension Scheme is governed by the NPS Trust & managed by the Pension Fund Regulatory & Development Authority.
- Tax Advantages
It provides tax advantages to both self-employed & salaried individuals.
(a) Section 80CCD (1)
Get a tax deduction, maximum up to INR 1,50,000 u/s 80C.
(b) Section 80CCD (1B)
Get an additional tax deduction of a maximum of INR 50,000 u/s 80C.
- Voluntary Participation:
This scheme can be availed by any Indian resident between 18 & 70 years.
- Cost-effective
It offers low-cost & economical investment Plans.
- Portability
Even in circumstances of a job change or any relocation, the National Pension Scheme Account remains the same.
- Superannuation Fund Transfer
The funds from the superannuation account can be transferred to the National Pension Scheme account.
Features & Benefits of ULIP
- Flexibility of Changing Life Cover:
This plan allows you to adjust the premium amount according to your comfort, which means the premium amount can be either increased or decreased. It helps in achieving an optimum coverage that best suits your future financial objectives.
- Availability of Premium Redirection:
This plan also allows you to change the type of fund to which you have redirected your investments, but only in the case of future investments. This option cannot be availed for the premium amount already redirected to date.
- Dual Benefits in One Package:
This plan offers the dual benefits of insurance & investments under one single plan, all for one single premium amount.
- Flexibility of Changing Life Cover:
This plan allows you to adjust the premium amount according to your comfort, providing you with optimal coverage to achieve your future financial objectives.
- Tax-free Payouts:
The death benefits received by your nominees are exempt from tax under section 10(10D) of the Income Tax Act, 1961, leading to savings.
Which One to Choose: ULIP or NPS?
NPS should be chosen in case of the following cases:
- In case you want to opt for long-term savings with low risks.
- In case you want to avail taxation benefits u/s 80C & 80CCD.
- In case you are looking for retirement plans.
ULIPs should be chosen in case of the following cases:
- This plan should be opted for in case life insurance coverage is also required with investment.
- In case you wish to switch between the funds depending on the market conditions.
- If you consider yourself to be financially independent & stable in the near future.
- In case you need tax benefits on investments made & ascertain the ULIP Returns.
- If you are considering long-term investments with limited liability.
Conclusion
There are multiple factors on the basis of which one can decide which plan to buy, such as financial objectives, risk appetite, & financial protection required. Hence, assess your requirements & objectives from the plan & then choose accordingly. If your main objective is buying a long-term retirement plan with taxation advantages, opt for a National Pension Scheme. But if you want some investment factor also to be included, reach out for ULIPs. Additionally, one can consult a financial advisor to make an informed decision about the selection.