Why ULIPs are better than FD....?

(Revised)

Dear Readers we are very sorry for the confusion caused from the last article we
published with the title “Why ULIPs are better than FDs”. We explained the article by
taking few parameters into consideration and those are the actual facts but we didn’t
mention it in the article. We think that created confusion in few of you. We would like
to clarify those points for your interest in this article. Following are the points
illustrated/ discussed in this article.

• Comparison of returns from ULIPs and FDs

• Comparison of Tax liability on the Contribution to ULIPs & FDs
• Comparison of Tax liability on the Maturity benefits from ULIPs & FDs
• Reason for highlighting Birla Sun Life Insurance
• Clarity on charges in ULIP Plans

Returns on FD
Here we are assuming that Mr. Rahul is investing Rs. 100000 every year for 5 years. In
FD we don’t have the option to invest every year on the same account. So Rahul
decided to invest Rs.100000 in the first year for 5 years term, Rs. 100000 in the
second year for 4 years term, Rs. 100000 in the third year for 3 years term, Rs.
100000 in the fourth year for 2 years term and Rs. 100000 in the fifth year for 1 year
term. From the below given illustration you can clearly understand the total return that
Rahul is going to receive at the end of fifth year.

Tax Rate
We are taking the Income Tax rate as 30% considering the annual income of Rahul is
more than Rs. 500000.

For Five years

Below given table will help you to find out the returns that Rahul is going to receive at
the end of 5th year for a FD of 5 years term.
The return received at the end of 5th year is Rs. 1,46,932.8077.

For Four Years

This table will help you to find out the returns that Rahul is going to receive for a FD of
4 years term.

The return received on 4 years FD will be Rs. 1,34,793.55.

For Three Years

Below given table will help you to find out the returns that Rahul is going to receive for
a depodit of 3 year’s term.
The return received on 3 years FD will be Rs. 1,24,229.69.

For Two Years

This table will help you to find out the returns that Rahul is going to receive for a FD of
2 year’s term.

The return received on 2 years FD will be Rs. 115,025.25

For One Year

From this table you can see the Return Rahul is going receive for a FD of 1 year term.
The return received on 1 years FD will be Rs. 1,07,000

Total Returns from FD

For 5 year term – Rs. 1,46,932.80
For 4 year term – Rs. 1,34,793.55
For 5 year term – Rs. 1,24,229.69
For 5 year term – Rs. 115,025.25
For 5 year term – Rs. 1,07000.00

Returns from ULIP

Below given table will provide you details about the performance of ULIP returns over a
period of 5 years.

The return from ULIP is far better than FD. Because FD has generated a total return of
Rs. 5,89586.89 during a period of five years. But the returns from ULIP is Rs.
6,60431.18 that is Rs. 70,844.29 more than FD.
 Tax Calculation on the Contribution
Below given table will help you to understand the tax amount on the contribution of FD
& ULIP

Tax liability on the Contribution to FDs

Term Yearly Contribution Tax (30%)
5 years 1,00,000
Nil*
4 years 1,00,000 30,000
3 years 1,00,000 30,000
2 years 1,00,000 30,000
1 year 1,00,000 30,000
Total Tax Amount Rs. 1,20,000
*If you are investing in FD for a term of 5 years (in tax saving scheme) you will be
eligible to get tax benefit on the contribution (i.e. on Rs. 1,00,000).

Note: Tax on contribution (Rs 1,00,000) will not be deducted from your deposit. But
remember you have to pay a Tax of Rs. 30,000 every year from your income
towards this contribution.

Tax liability on the Contribution to ULIPs

Term Yearly Contribution Tax (30%)
5 years 1,00,000
Nil*
4 years 1,00,000 Nil
3 years 1,00,000 Nil
2 years 1,00,000 Nil
1 year 1,00,000 Nil
Total Tax Amount Nil
* The amount you are paying as a premium to ULIP is absolutely free from tax. It
means there is no need of paying tax on the amount you are invested in ULIPs (subject
to a maximum of Rs.1,00,000).

Tax Calculation on Total Returns

Tax Calculation on Returns from FD
Term Return Taxable Return Tax (30%) Actual Return
5 years 1,46,932.80 46,932.80 14079.84 132852.96
4 years 1,34,793.55 34,793.55 10438.07 124355.48
3 years 1,24,229.69 24,229.69 7268.91 116960.78
2 years 1,15,025.25 15,025.25 4507.58 110517.67
1 year 1,07000.00 7000.00 2100 104900.00
Total Returns Rs. 5,89586.89
Tax Calculation on Returns from ULIP
Term Return Taxable Return Tax (30%) Actual Return
5 years 6,60431.18 Nil Nil 6,60431.18
Total Returns Rs. 6,60431.18
Real Returns Analysis
This table shows you the returns on your investments after considering all the tax
liabilities including contribution and return.
Real Returns on FD
Contribution Tax Value Return Tax Value Real Return
1,00,000 Nil 1,00,000 46,932.80 14079.84 32852.96 1,32,852.96
1,00,000 30000 70,000 34,793.55 10438.07 24355.48 94355.48
1,00,000 30000 70,000 24,229.69 7268.91 16960.78 86960.78
1,00,000 30000 70,000 15,025.25 4507.58 10517.67 80517.67
1,00,000 30000 70,000 7000.00 2100 4900.00 74900.00
Total Returns Rs. 4,69,586.89
Real Returns on ULIP
Contribution Tax Value Return Tax Value Real Return
5,00,000 Nil 5,00,000 1,60,431.18 Nil 1,60,431.18 6,60431.18
Total Returns Rs. 6,60431.18
While looking at the real returns (Rs. 4,69,586.89) from FD you might feel that it is a
wrong calculation. Because the total returns is less than your investment. At the end of
5th year you will receive an amount ofRs. 5,89586.89. But remember on the other hand
you have to pay tax on your investments; it is not free from tax. For your easy
understanding we have shown it as a deduction from your Returns. But in case of ULIPs
your investments and returns are free from tax.

Reason for highlighting Birla Sun Life Insurance

We don’t have any intention to promote Birla Sun Life Insurance products. We just
wanted to show you some of the best performing funds in the market. In this article we
have chosen three products of Birla Sun Life (without any bad intention), in our next
article it can be HDFC Standard Life, ICICI Pru Life or any other company. As per the
Fund Performance report came in moneycontrol.comBirla Sun Life’s fund were in the
top position. This is the main reason of choosing Birla Sun Life Products. Below given
two tables are the screen shots taken from moneycontrol.com. It has given the return
of ULIP for the last 3 years, returns in long term will be much better than this.