ELSS vs ULIP Comparison of ELSS Funds with Unit Linked Insurance Plans

Equity-Linked Savings Schemes (ELSS) and Unit-Linked Insurance Plans (ULIP) both are popular investment options to get tax benefits under Section 80C of Income Tax Act, but they both are differ significantly in terms of their structure, investment objectives, and Nature.

To choose between the two, you must align your financial objective and goals to the schemes and select the one that suits you the best. Below is a comprehensive comparison of ULIPs vs ELSS, covering their key features, advantages, and disadvantages.

What is an Equity Linked Savings Scheme (ELSS)?

ELSS is a diversified, equity mutual fund. The scheme invests in the capital market and selects companies with different market capitalizations. In a financial year, an investor can claim a tax deduction of up to Rs 1,50,000 against investments made in ELSS. These investments have a mandatory lock-in period of three years from the time of investing.

Things to Know About ELSS

• You are free to invest any amount in an ELSS. However, for tax deductions, contributions of only up to Rs 1,50,000 will be considered.
• ELSS is the best tax-saving investment option and offers the dual benefit of tax deductions and the potential to earn higher returns with a short lock-in period.
• The returns on ELSS are not tax-exempt.
• You can continue to invest in this scheme even after the completion of the mandatory lock-in period of three years.
• The risk involved with ELSS is higher when compared to a fixed deposit or a PPF, but the returns are potentially higher as well.

What is Unit Linked Insurance Plan (ULIP)?

ULIP is an investment plus insurance product where one part of the investment is used for ensuring the investor, while the other part is invested in the products of his/her choice. 

Investors can choose to invest in equity, debt, hybrid, or money market funds through ULIPs. Of the amount invested in ULIPs, a contribution of up to Rs 150,000 can be claimed as the tax deduction under Section 80C of the Income Tax Act.

These investments have a lock-in of five years. An investor can choose to switch from equity to debt or hybrid as per their investment objective during the lifecycle of the investment.  

Things to Know About ULIP

• ULIPs offer both protection in the form of an insurance policy and the power of an investment. This sets ULIPs apart from other traditional investment policies.
• In the initial years, the premium of the ULIP payment goes towards meeting one’s insurance needs and policy expenses.
• Post these deductions; the premium is divided between providing you with a life cover and buying fund units for investment.
• The expenses involved in ULIP investment includes premium allocation charges, administration charges, mortality charges and fund management charges.

Nature of Investment

ULIP 

• ULIP is a hybrid product that comes with the combination of both the life insurance with investment. Part of the premium is allocated towards providing life insurance coverage, while the rest is invested in market-linked instruments like equity, debt, or a mix of both. 

ELSS

• ELSS is a type of mutual fund that invests primarily in equity and debt, offering exposure to the stock market without any insurance coverage. It is a purely investment-oriented product.

Tax Benefits

• ULIP:  
• ELSS:  

Charges

• ULIP:  
• ELSS:  

Lock-in Period

• ULIP
• ELSS

Liquidity

• ULIP
• ELSS

Returns

• ULIP:  
• ELSS:  

Risk Factor

• ULIP:
• ELSS:  

Flexibility

• ULIP:   
• ELSS:  

Purpose

• ULIP:  
• ELSS:  

Taxation on Returns

• ULIP:  
• ELSS:  

Summary Comparison: ULIP vs ELSS

Conclusion

• Consider ULIP when you want a combination of life insurance and investment while comfortable with higher charges and a longer lock-in period.
• Consider ELSS when you're looking for a pure investment option that offers higher potential returns, lower charges, and a shorter lock-in period

It’s crucial to evaluate your financial goals, risk tolerance, and investment horizon before choosing between ULIPs and ELSS. You might also want to consult a financial advisor to make an informed decision based on your needs.