For those looking at tax savings instruments the Unit Linked Insurance Plan (ULIPs) and Public Provident Fund (PPF) are two excellent choices.
PPF does not offer insurance cover
One of the biggest advantages that the ULIP gives against the Public Provident Fund is the insurance cover. PPF does not offer any insurance cover, while the ULIP does.
The minimum cover that a Unit Linked Insurance Plan gives is 10 times the premium. The upper cover that you get is 100 times the premium. The insurance cover is pretty decent. So, if you invest Rs 50,000 a year and if something were to happen to you the nominee gets an amount of Rs 5,00,000 immediately. In addition the amount invested also continues till the scheme is in existence. The insurance cover may not be as high as a term policy, but is decent enough.
PPF tends to offer you a fixed return ever year and the interest rate is decided by the government at the start of the financial year. So, currently if the interest rate if 8.7% it may vary next year. In the ULIP there is no fixed returns. Your returns would also depend on the investment choice. If you have opted for fund investment in the equity markets your returns could be very high or be low depending on how the stock markets perform. On the other hand a lot of your returns would be eaten away by the insurance premium charge, fund management charge and policy administration charge.
Both the ULIP and the PPF offers similar tax benefits. For example, the amount invested is given tax benefits under Sec 80C of the Income Tax Act. On the other hand the interest earned is also tax free in the hands of the investor. Not much of a difference between these two at the moment. The upper limit for claiming tax benefits under both the schemes at the moment is Rs 1.5 lakhs.
In terms of liquidity the Unit linked Insurance Plan has an edge. You can withdraw the amount after 5 years, while in the case of the Public Provident Fund withdrawal is allowed only after completion of 7 years, in which case there is partial withdrawal. Full withdrawal is allowed only after the completion of 15 years.
In which scheme to invest would purely depend on you. ULIP returns might be lower if you invest in the money market scheme because of the various charges, but it does provide decent insurance coverage. Liquidity is also slightly higher in the case of an ULIP.