NPS vs ULIPs: Which is a better option?

There are a variety of investment options in the market. Often an individual is confronted with the dilemma which one to choose for investment. National Pension System (NPS) and Unit Linked Insurance Plan (ULIP) often offer the same dilemma before a common investor. While on one hand, ULIPs have the advantages of dual benefits of insurance and investments, NPS has the benefit of a stable post-retirement pension apart from a lumpsum one-time payment. Both NPS and ULIP are also the most popular tax-saving options covered under section 80C of the Income Tax Act. So, before making any decision, take a look at all aspects against the backdrop of your specific financial needs.

Understanding NPS and ULIPs

Let us begin the discussion by understanding NPS and ULIPs for a prospective investor.

NPS is a government pension scheme. Employees working in the government except armed forces staff, private, public, and unorganised sectors can subscribe to this scheme. The subscribers may choose to withdraw a certain percentage of the corpus once they retire, and the remaining amount will be paid out as a monthly pension.

On the other hand, ULIPs are a combination of insurance plans and investments. The objective of an 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.

NPS vs ULIP: comparison

As investment opportunities, ULIPs and NPS have their own features. Here is a comparison on key parameters:

i) Cost: NPS is considered a low-cost investment for most. An initial subscription charge of Rs 100 is levied while management fees are limited to under 0.25%.

On the other hand, as ULIPs invest in debt and equity instruments, the management fee is higher than that of NPS. It can go up to 1.35%.

ii) Minimum contribution: In NPS, every fiscal year, you must contribute a minimum of Rs 1,000 for Tier I and Rs 250 for a Tier II account.

Since ULIPs are insurance products, the premium payable will generally be fixed and you cannot pay less than that. That’s why the minimum contribution for ULIPs is higher than that of NPS.

iii) Withdrawals: For partial withdrawals, you must meet certain specific conditions. You can withdraw a maximum of 20% of the corpus before you turn 60.

ULIPs come with a lock-in period of 5 years.

iv) Tax: NPS comes under the tax bracket EET. The amount withdrawn at maturity is subject to taxation.

On the other hand, contributions to ULIP are tax-deductible under Section 80C.

What should investors choose?

The answer to this question depends on what kind of investment opportunity you are looking for.

“As ULIPs offer both growth and insurance options there is no doubt that it is a good option of investment. But NPS is more suitable for those who prefer low risk investments or have already invested a large amount of money in ULIPs. In general, till at the age of 40 or 45, one can take risk and prefer to invest their savings in the risk baskets. But after the age 45 years, I think, everyone should change their strategy and select a safe option for their investment,” said Suman Nandi, a chartered accountant and personal finance advisor.