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ELSS funds vs. ULIP: Comparing Equity Linked Saving Scheme with Unit Linked Insurance Plans

Two-in-one offers that give the best of both worlds can be exciting, especially since if it comes at the price of one. This goes for investments too. Investors take delight in a product that can provide reasonable returns and reduce their tax outgo.

ELSS funds and ULIPs are two such popular options among investors in this regard. So, which should you choose, among the two? Let’s find out.

Tax implications of ELSS and ULIP

Equity Linked Saving Schemes (ELSS) and Unit Linked Insurance Plans (ULIPs) are like chalk and cheese. They are two unique financial products that cater to distinct financial requirements. However, there is one single factor that connects the two: tax.

When you invest in ELSS funds, you can avail a tax deduction of up to Rs. 1.5 lakh, each year, under Section 80C of the Income Tax Act. Similarly, you can save tax under Section 80C up to Rs. 1.5 lakh on the premium you pay towards your ULIP policy each year.

What is Equity Linked Saving Scheme (ELSS)?

An Equity Linked Saving Scheme (ELSS) is an open-ended equity oriented mutual fund scheme that provides the dual benefits of wealth creation and tax saving. The funds are popularly known as tax saving mutual funds. As the name suggests, ELSS funds primarily invest into equities. As a result, the returns earned are linked directly to market performance. If you are interested in long-term financial gains, ELSS funds can be a suitable option to consider.

Features of ELSS Mutual Fund

  1. Tax benefits
    As mentioned, you can avail a tax deduction of Rs. 1.5 lakh on investments in ELSS every year. That said, you can invest much more than Rs. 1.5 lakh in ELSS mutual funds. There is no upper limit on the amount you can invest. Also, keep in mind that on schemes held for more than a year, returns exceeding Rs. 1 lakh are subject to 10% Long Term Capital Gains (LTCG) tax.
     
  2. Equity investments
    ELSS funds have the potential to build wealth in the long-term. You can sync your investments in a manner that can achieve your financial goals across life stages.
    For instance, you may want to fulfil the down-payment of your house in five years, embark on a world tour in ten years or save up for your retirement 20 years later. Investing steadily in ELSS funds can help you accomplish these goals at the right time.
     
  3. Lock-in period
    At just three years, ELSS funds come with the one of the lowest lock-in periods among tax-saving products. This is shorter than the 15-year lock-in period of Public Provident Funds (PPF) or the five-year lock-in period of ULIPs.
     
  4. Risk
    ELSS funds invest in equities which expose them to higher risk, compared to a traditional tax-saving option such as a PPF.

What is Unit Linked Insurance Plan (ULIP)?

Unit Linked Insurance Plans (ULIPs) occupy a unique space in the spectrum of financial products. This is because they offer the twin benefits of insurance and investment in a single package. ULIPs are also famously known for their tax benefits.

ULIPs come with a lock-in period of five years. And during the first few years, your premium goes towards your insurance policy and other expenses. To benefit from the returns, you need to be invested for the long term.

Features of ULIP

  1. Tax benefits
    You can avail up to Rs. 1.5 lakh as a tax deduction on your ULIP premium. Besides, the returns at the time of maturity are exempt from income tax under Section 10(10D) of the Income Tax Act.
     
  2. Different types of ULIPs
    ULIPs come in varied options. The choices can range from conservative to aggressive ULIPs. On the conservative end, your money is invested primarily in debt funds and other money-market securities. But in the case of aggressive ULIPs, your funds are directed towards equities. You can choose among different types based on your risk appetite and financial goals.
     
  3. Expenses
    A ULIP policy involves fees to cover its insurance and investment aspects. The charges include fund management fees, premium allocation charges, mortality charges and administration costs, among others.
     
  4. Premium division
    After the necessary deductions, the remaining amount is split in two ways. The first portion is used to buy a life cover, and the second is used to purchase fund units. You can switch from debt to equity to hybrid funds as per your goals during the tenure of the investment.

ELSS vs. ULIP: Comparative Analysis of ELSS & ULIP

Product type Insurance cum investment product Pure investment product
Investment areas Equity, debt, hybrid and money-market instruments Mostly equity and equity-related securities
Returns Returns are market-linked and vary on type of ULIP chosen Returns are market-linked
Charges Mortality charges, premium allocation fee, fund management cost and administration charges

Scheme expenses

Exit load (if applicable)

Tax treatment Tax deduction of Rs. 1.5 lakh under Section 80C but gains are taxable

Tax deduction of Rs. 1.5 lakh under Section 80C but LTCG taxable @ 10% for returns above Rs. 1 lakh

Lock-in period A mandatory lock-in period of 5 years A mandatory lock-in period of 3 years

Conclusion

Therefore, if you want an investment product that gives you exposure to equities and also provides you with tax benefits, ELSS funds can be the way to go. ULIPs also provide a similar service. Essentially, ULIPs are insurance products that seek to offer market-linked returns on your money through investments.

Next To Come: Are you Saving Or Are You Investing