Understanding ULIP and PPF

ULIP vs PPF

If you are an investor and looking for a better investment option, a plethora of options are available in the market. Some of these options serve the purpose of investment as well as insurance along with tax savings. Some of them are ULIPs, PPF, ELSS mutual funds, etc. How can you choose the most accurate and suitable plan from this wide range of options? It is sensible to look into all aspects of a particular investment before zeroing down on one. This should be further linked with your specific financial goal. In this article, you can read about all the features of ULIP and PPF.

What is PPF?

• PPF stands for Public Provident Fund and is a government introduced scheme launched in 1968 for promoting savings.

• It is one of the popular investment options among Indian investors as it is very stable.

• PPF offers attractive interest rates and returns that are fully tax exempt. The rate of interest for PPF is decided by the government annually. The existing rate of PPF is 7.1%.

• PPF was introduced to inculcate the habit of savings among Indians.

• Earlier PPF could only be opened via post office. Now, they can be opened at all public and private sector banks. Also, you can open PPF online and link it directly to your salary account.

What are ULIPs?

• ULIPs stands for Unit-Linked Insurance Plans.

• It is a scheme that provides both investment and life insurance to the policy holder.

• Life cover is provided using a portion of the ULIP premium, while the other part is invested in money-making funds like equity, debt or hybrid.

• It is a long-term investment and the lock-in period is 5 years.

• Under Sec 80C of the Income Tax Act, 1961, tax deduction can be claimed for ULIP. But, the premium paid towards the ULIP scheme should be less than 10% of the Sum Assured.

• You can easily switch funds in the case of ULIPs.

Which is Better - ULIPs or PPF?

When we have a comparison between PPF and ULIP, we can understand PPF or ULIP, which is better. For that, check out the benefits of ULIP and PPF.

Benefits of ULIPs

• ULIPs provide the benefits of investment as well as life insurance cover.

• The lock-in period of the policy is five-year and it allows investors to achieve their financial goals easily.

• Partial withdrawal from the investment after completion of the lock-in period is allowed.

• ULIPs offer several tax benefits under the old and new income tax structure.

Benefits of PPF

• The PPF scheme has up to 15 years of tenor after which the investor can make withdrawals that are tax-free.

• A model of taxation called EEE (Exempt-Exempt-Exempt) is followed.

• The investors can be assured that it is a safe and reliable savings instrument since it is a government introduced scheme.

• PPF allows investors to take loans against their PPF account.

Difference Between ULIP and PPF

To understand the key differentiating points between the PPF vs ULIP, follow the table given below.

Factors to Consider Before Deciding Between ULIP and PPF

Consider the factors mentioned below before opting one from ULIP vs PPF.

• Coverage:

  ULIP offers the benefits of life insurance cover and investment in a single policy, whereas PPF is solely a scheme for savings and no insurance coverage is provided.

• Investment Returns:

  PPF provides fixed returns every year, and the Indian government decides the interest rate at the start of each financial year. For the year 2021-22, the PPF has an interest rate of 7.1%. On the other hand, ULIP does not offer any fixed interest. The amount you receive as maturity or the death benefit received by your dependents will be based on the market performance at that point.

• Taxation:

  Returns on ULIP and PPF are tax-free under Section 10(10D) of the Income Tax Act, 1961. However, note that ULIPs issued after February 1, 2021, will be treated as capital gains if the annual premium paid is more than Rs. 2.5 Lakh and such policies will be taxed at 10% at maturity.

• Liquidity:

  Here, ULIPs have an upper hand over PPF. After the completion of the five-year lock-in period, you can make a partial withdrawal from ULIP. However, the same is seven years in PPF. Also, you can make full withdrawals from your PPF after completing the 15 years.

Conclusion

After comparing ULIP vs PPF, the investor can decide to invest in either ULIPs or PPF. Analyse the financial needs before investing in any financial instrument. In the long run, ULIP provides reasonable returns though it has some risks involved. Moreover, in a single plan, ULIP has benefits of both life insurance cover along with investment. If you have any confusion, you can always seek a financial advisor’s professional guidance before making any final decision about your investments.