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

Updated on :  

08 min read.

ELSS mutual funds and ULIPs are quite different from one another, equally lucrative in their purpose. 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.

Tax implications

Equity-Linked Savings Scheme (ELSS) and Unit-Linked Insurance Plan (ULIP) are two of the most popular investment options covered under the provisions of Section 80C of the Income Tax Act, 1961. The other investment options are Public Provident Fund (PPF), tax-saving fixed deposit, National Pension Scheme (NPS), and so on. These investments offer different return opportunities and risk categorisation, but one common denominator connects them – tax benefit.

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 capitalisations. 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.

Things to Know About ELSS

ELSS funds
  • 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

Unit linked insurance plan
  • 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.

Comparative Analysis of ELSS and ULIP

ParticularsULIP (Unit-Linked Insurance Plan)ELSS (Equity-Linked Savings Scheme)
Lock-in periodULIPs have a mandatory lock-in of 5 yearsELSS has 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 at 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 shown 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 an investment tool. 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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