NPS vs ULIP - Which One Is Better?

NPS (National Pension System) and ULIP (Unit Linked Insurance Plan) are tax-saving investment financial instruments in India that offer you unique benefits and serve distinct financial goals. While NPS is primarily designed to provide a retirement fund, ULIP combines insurance and investment components. Understanding the differences between these two investment options is crucial for making informed financial decisions. In this comparison, we will explore the key features, benefits, and considerations of NPS vs ULIP to help you navigate the world of personal finance more effectively.

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6.7 Crore
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51
Insurance Partners
3.4 Crore
Policies Sold
Pension Funds
Pension Funds Most Popular
Fund Name
AUM
Returns (in %)
3 Year
5 Year
10 Year
11,380 Cr
Returns
24.25%
Highest Return
Returns
23.2%
Returns
21.58%
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5,651 Cr
Returns
29.27%
Highest Return
Returns
26.75%
Returns
19.47%
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4,058 Cr
Returns
26.02%
Highest Return
Returns
19.28%
Returns
19.28%
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5,938 Cr
Returns
24.72%
Highest Return
Returns
18.51%
Returns
18.52%
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35,583 Cr
Returns
21.4%
Highest Return
Returns
18.81%
Returns
18.1%
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12,743 Cr
Returns
18.51%
Highest Return
Returns
16.67%
Returns
15.69%
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2,999 Cr
Returns
19.01%
Highest Return
Returns
15.73%
Returns
14.59%
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About NPS

The National Pension System (NPS) is a voluntary, market-linked, defined contribution pension scheme offered by the Government of India. It is designed to help individuals build a fund for their retirement years.

NPS allows you to invest systematically during your working years, with the flexibility to choose between various investment options. It provides a mix of equity, debt, and government securities to generate returns over the long term.

You can choose from two types of NPS accounts: 

  • Tier I: A retirement account

  • Tier II: A voluntary savings account

NPS aims to provide financial security in retirement and is known for its tax benefits and low-cost structure.

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About ULIP

ULIPs, or Unit Linked Insurance Plans, is a unique financial product that combines insurance and investment. It offers you the opportunity to invest in a variety of funds while providing life insurance coverage. 

A portion of the premium paid goes towards insurance coverage, and the remaining amount is invested in funds of your choice, such as equity, debt, or balanced funds. 

ULIPs offer the potential for wealth creation and goal-based financial planning. They are known for their flexibility, transparency, and the ability to switch between investment options, making them a versatile financial instrument.

NPS vs ULIP

Let’s understand the key differences between the two investment options for getting more clarity in the NPS vs ULIP comparison.

Aspect NPS (National Pension System) ULIP (Unit Linked Insurance Plan)
Purpose Retirement savings Investment, insurance, and retirement planning
Tax Benefits Offers tax benefits under Section 80C and 80CCD(1B) of the Income Tax Act, 1961. Offers tax benefits under Section 80C and 10(10D) of the Income Tax Act, 1961.
Investment Options Typically offers a mix of equity, debt, and government securities Offers various fund options, including equity, debt, and balanced funds
Liquidity Limited liquidity, primarily for retirement, with restrictions on withdrawals before retirement age Offers more liquidity with partial withdrawals allowed after a lock-in period of 5 years
Maturity Benefits Provides a lump sum or annuity options upon retirement Offers maturity benefits as a lump sum or as a combination of maturity and insurance coverage
Insurance Component Primarily focused on building a retirement fund; no insurance component Combines insurance coverage with investment, providing a death benefit
Flexibility Limited flexibility; contributions are typically fixed Flexible premium payments and the ability to switch between investment funds
Risk Tolerance Lower risk as it includes safer investment options Varies based on the selected funds
Lock-In Period Typically, until retirement (partial withdrawals allowed after a specific period) 5-year lock-in period; partial withdrawals allowed after the lock-in period
Transparency Transparent with clear investment options Transparent investment options for the chosen ULIP plan

Which is Better: NPS vs ULIP?

Both NPS (National Pension System) and ULIP (Unit Linked Insurance Plan) serve different financial purposes. Let us understand the pros of both NPS and ULIP based on their features.

  1. NPS is ideal for retirement planning:

    NPS is a long-term savings tool offered by the government, providing tax benefits. It focuses on building a retirement corpus through investments in equity and debt.

  2. ULIP combines insurance and investment 

    A Unit Linked Insurance Plan offers life coverage along with investment options in equity, debt, or money market instruments. ULIPs can be more flexible with multiple ULIP fund options.

So, which is better for you?

If you are looking for a low-cost, flexible retirement plan with tax benefits, NPS is a good option. However, if you are looking for a simple investment plan with the potential for higher returns and life insurance coverage, ULIP may be a better choice.

Ultimately, the best way to decide which option is right for you is to consider your individual financial goals and risk tolerance.

NPS vs. ULIP - Summing It Up

When comparing NPS vs ULIP, it is essential to consider your financial goals and risk tolerance. NPS offers a tax-efficient retirement savings plan with a focus on long-term wealth accumulation. ULIP, on the other hand, combines insurance with investments, providing flexibility along with various tax benefits. Your choice should align with your specific financial needs and objectives, ensuring a secure and prosperous financial future.

FAQ's

  • Which is better, NPS or ULIP?

    The choice between NPS vs. ULIP depends on your financial goals, risk tolerance, and investment preferences. If you prioritize retirement savings and tax benefits, NPS may be a better choice. On the other hand, if you want a combination of insurance coverage and the potential for wealth creation for your retirement planning, ULIP might be more suitable.
  • Which investment is better than NPS?

    Whether NPS is a better investment than other options depends on your individual circumstances and investment goals. However, some investments that may be considered better than NPS are as follows:
  • Is NPS better than LIC policy?

    The following table shows the comparison between NPS and LIC Policy:
    Feature NPS LIC Policy
    Tax benefits Yes, up to Rs. 50,000 per year under Section 80CCD(1B) Yes, up to Rs. 1.5 lakhs per year under Section 80C
    Portability Yes, you can transfer your account from one pension fund to another without any hassle. You can switch between different investment funds provided by the insurer.
    Potential returns Higher, as investments are invested in a variety of asset classes Varies depending on the investment funds selected
    Guaranteed returns No Yes, some policies offer guaranteed returns
    Life insurance cover No Yes, some policies offer life insurance cover
  • What are the disadvantages of NPS and ULIP?

    The below table summarizes the key disadvantages of NPS vs. ULIP:
    Feature NPS ULIP
    Limited exposure to equities Yes Yes
    Mandatory annuity Yes No
    Complex withdrawal rules Yes Yes
    High charges Yes Yes
    Complexity Moderate High
    Market risks Yes Yes

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
+Returns Since Inception of LIC Growth Fund
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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