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Single Premium ULIP or a PPF - Which One is Better?

ULIP offers an advantage over PPFs. Understand the difference between ULIP and PPF and decide which one to invest in based on your financial goals.

  • 7,611 Views | Updated on: Jan 10, 2024

In the last decade, India’s investment market growth has been exponential. Today, with the growth of technology, investing has become much more accessible and, at the same time, much more secure. These days, most people use investment as an opportunity to save taxes, create wealth, and have a financially protected future. Some of the best tax-saving options that you get in India include ELSS (Equity Linked Saving Scheme), ULIP (Unit Linked Insurance Plan), PF (Provident Fund), MFs (Mutual Funds), PPF (Public Provident Fund), and so on.

With so many investment options available, it is tough to pick the right one. This article will discuss which investment option is better: a single premium ULIP or PPF. To understand the difference between ULIP and Traditional plans like the PPF lock-in period, you need to understand what these actually are and then decide on investing per your financial goals.

What is Public Provident Fund?

The Public Provident Fund is a government-backed savings scheme introduced in India in 1968 under the Public Provident Fund Act. Its primary objective is to encourage individuals to save for their retirement while simultaneously offering attractive tax benefits. The PPF is administered by the Department of Posts and select nationalized banks across the country.

The PPF calculators will tell you the amount you make from investing in such a fund. Also, while using the PPF calculator, you will understand why traditional investment tools are a safe investment option. However, these funds are highly rigid, and you don’t get much freedom of choice if you invest in PPF. For example, PPFs have a minimum lock-in period of 15 years.

Some Top Features of PPF (benefits of investing in PPF)

  • Safe investment option
  • Tax-free withdrawals after 15 years
  • The Government of India has backed an investment scheme

What is a Unit Linked Insurance Plan (ULIP)?

A Unit Linked Insurance Plan (ULIP) is a unique 2-part investment offering that enables you to use the benefits of life insurance and investment in a single plan. One part of the premium paid is used towards life insurance, while the other part is invested into different funds that are managed individually. The funds include equity, debts, bonds, stocks, or a hybrid investment. In addition, you can use a ULIP Calculator, via which you can easily calculate a rough estimate of the return you will get at maturity and after all the deductions. These online ULIP calculators, however, are just for a rough prediction. The actual value depends on how you manage your ULIP funds portfolio (No ULIP calculator can predict an accurate return).

Which one is better: Unit-Linked Insurance Plans (ULIPs) vs Public Provident Fund (PPF)

Some Top Features of ULIPs

  • Dual benefits of life insurance and market investment.
  • It allows you to be secure and maintain a financial pace simultaneously.
  • Helps in planning financial goals for a long-term investment.
  • A comparatively lesser lock-in (maturity) period.
  • Helps save tax.
  • Allows Partial withdrawals.
  • Provides online ULIP fund-switching options.
  • Allows premium top-ups for adding to the investment.

ULIP vs PPF

It is highly advised to check the basic difference between ULIP and traditional plans to understand their benefits and choose the best plan based on your financial goals.

Criteria

ULIP

PPF

Returns

Varied returns wherein an individual can manage portfolios of funds.

Fixed interest and returns (Decided by the Government annually).

Lock-in Period

Minimum 5-year lock-in period.

15-year maturity period.

Tax Benefits

Tax exemption on investment of up to ₹2,50,000/annum. Additional taxes are applicable above this amount under the IT Act.

Tax saving options are available under the Income Tax Act.

Liquidity options

Funds may be available after the completion of the Lock-in period. It varies based on policy guidelines.

Partial withdrawal is allowed - you can make a partial withdrawal only after 7 years.

Factors to Consider Before Choosing ULIP and PPF

Now that you know all about Unit Linked Insurance Plan and Public Provident Fund, move ahead to learn some important factors one must consider before choosing the right option - ULIP or PPF.

Coverage

ULIP combines the benefits of life insurance and investing into a single policy, whereas PPF is merely a savings scheme with no insurance coverage.

Investment Returns

PPF offers fixed annual returns, and the interest rate is set by the Indian government at the start of each fiscal year. The PPF lock-in period has an interest rate of 7.10% for the fiscal year 2023-24. ULIP, on the other hand, does not provide any set interest. The amount you receive as maturity or the death benefit received by your dependents will be determined by the current market performance.

Taxation

Under Section 10(10D) of the Income Tax Act of 1961, ULIP and PPF lock-in period returns are tax-free. However, ULIPs issued after February 1, 2021, will be considered capital gains if the yearly premium paid exceeds ₹ 2.5 Lakhs, and such policies will be taxed at 10% at maturity.

Also Read: What is Section 10d of the income tax Act?

Liquidity

In this case, ULIPs outperform PPF. You can make a partial withdrawal from your ULIP after the five-year lock-in period is up. The same is true for seven years in PPF. In addition, after 15 years, you can withdraw the entire amount from your PPF.

Which is Better - ULIP or PPF

Both these financial instruments serve distinct purposes and offer unique advantages, making the comparison between them a subject of interest for individuals seeking to optimize their financial portfolios. But which one is better for you? Find out now.

Risk Profile

ULIPs involve market-linked risks due to their investment component, making them suitable for individuals with a higher risk appetite. PPF, on the other hand, is ideal for risk-averse investors seeking steady returns.

Flexibility

ULIPs offer greater investment flexibility, allowing policyholders to switch funds and alter investment strategies. PPF has a fixed tenure, promoting long-term savings discipline.

Tax Benefits

Both ULIPs and PPF offer tax benefits, but ULIPs have the potential for higher returns, while PPF provides assured and consistent gains.

Insurance Component

ULIPs provide life insurance coverage, making them a suitable choice for those seeking insurance along with investment. PPF does not offer insurance coverage.

Conclusion

After comparing ULIPs and PPFs, the investor can decide whether to invest in ULIPs or PPFs. Before investing in any financial instrument, consider your financial needs. In the long run, ULIPs generate decent returns despite some risks. Furthermore, ULIP provides the benefits of both life insurance coverage and investing in a single plan. If you are unsure, you may always seek expert advice from a financial counsellor before making any final decisions about your assets.

Key takeaways

  • The primary objective of PPF is to encourage individuals to save for their retirement while simultaneously offering attractive tax benefits.
  • The PPF calculators will tell you the amount you make from investing in such a fund.
  • A Unit Linked Insurance Plan (ULIP) is a unique 2-part investment offering that enables you to use the benefits of life insurance and investment in a single plan.
  • One part of the premium paid is used towards life insurance, while the other part is invested into different funds that are managed individually.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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