Equity Linked Savings Scheme (ELSS) and Unit Linked Insurance Plan (ULIP) are two investment options from the list of investments that qualify for tax deduction under section 80C of the Income Tax Act. The other investment options are Public Provident Fund (PPF), Tax saving Fixed Deposit, National Pension Scheme (NPS), etc. These investments offer different return opportunities and have different risk categorization but one common denominator connects them – tax benefit.
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 ₹150,000 against investments made in ELSS. These investments have a mandatory lock-in period of three years.
a. You are free to invest any amount you like in an Equity Linked Savings Scheme. For tax deductions, contributions of only up to INR 1,50,000 will be considered under the Income Tax Act, Section 80C.
b. ELSS is one of the best investment options for investors which offers tax benefits with potentially higher returns and short lock-in periods.
c. The returns on Equity Linked Savings Schemes are not tax-exempt starting this year post the changes detailed in the recent Budget.
d. You can continue to invest in this scheme even after the completion of the lock-in period of 3 years.
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 ₹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.
a. ULIPs offer both protection of insurance and the power of investment. This sets ULIPs apart from other traditional investment policies.
b. In the initial years, the premium of the ULIP payment goes towards meeting one’s insurance needs and policy expenses.
c. Post these deductions, the premium is divided between providing you a life cover and buying fund units for investment.
ULIP (Unit Linked Insurance Plan)
ELSS (Equity Linked Savings Scheme)
|Lock-in period||ULIPs have a mandatory lock-in of 5 years||ELSS have a mandatory lock-in of 3 years|
|Returns||The returns can vary because an investor can choose any combination of equity, debt, hybrid funds in his investment.||Being market-linked, the returns depends on the scheme, but an investor can expect an approximate return of 12-14%.|
|What are the tax benefits?||The invested amount offers tax deduction under Section 80C, but gains are taxable.||LTCG under ELSS is taxed @ 10% over and above Rs. 1 lakh|
|What are the charges applicable?||There are complex and multiple charges like policy administration charges, premium allocation charges, mortality charges, etc.||Exit load and fund management charges are specified in the SID clearly and are easy to understand.|
|What about liquidity?||Funds can be available after the lock-in of 5 years subject to further policy conditions.||Funds will be available after the lock-in of 3 years.|
As can be seen above, ELSS offers a better package if you are investing for tax benefits and are comfortable with the market exposure of your capital. ULIPs, on the other hand, are primarily insurance options but not as efficient as investment tools. Any investor will do well by keeping these two aspects separate and by picking a plan that aligns with their goals and risk profile.
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