ULIP vs ELSS Which One is a Better Investment Options?

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ULIP vs. ELSS this debate has been ongoing for long. Though Unit Linked Investment Plans (ULIPs) and Equity Linked Saving Schemes (ELSS) vary from each other and solve different investment purpose. While choosing between the two it is imperative to align your future financial goals to both ELSS and ULIPs and see what works best for you. Here we will simplify this dilemma of ULIP vs. ELSS.

While both are different there are some similarities too. For example, both ELSS and ULIPs solve long-term investment purposes and also offer tax saving benefits to the investor. Both ULIP plans and ELSS have a lock-in period and give exposure to equities. However, the differences lie in terms of tax benefits, especially after alterations in the new budget. Moreover, there is an evident difference between the loading and costs involved in both ELSS and ULIPs. So how to decide which one is better and settle the debate- ULIP vs. ELSS?

Tax Treatment - ULIP vs. ELSS

Both ELSS and ULIPS are tax-saving instruments that offer a tax deduction of up to Rs 1.5 lakh u/s 80C. In ULIPS, the maturity amount is tax-free. And if you surrender before the lock-in period of 5-years, there will be tax and any deduction claimed earlier is withdrawn. And the gains are exempted under Section 10(10D).

If the annual premium is less than equal to the 10% of the sum insured then the tax exemption limit is Rs. 1.5 lakh provided the policy was purchased before April 01, 2012. ULIPS purchased after that then you are eligible for tax benefits of Rs. 1.5 lakh if the annual premium is less than or equal to 20% of the sum insured.

On the other hand, ELSS funds also provide tax benefits up to Rs. 1.5 lakh u/s 80. You can continue to invest even after the lock-in period of three years if the scheme is offering good returns until you reach your financial goal and get tax-saving benefits on the premium paid. 

What are Unit Linked Insurance Plans or ULIPS?

ULIP plans serve the dual purpose of insurance and investment under one scheme.  It gives a sense of financial security to the investor as a certain percentage of money is invested in the market that will help boost wealth.

And the best part about ULIP plans is that you can choose to invest either in debt, equity, hybrid, or money market funds. Moreover, you can choose to switch between debt, equity and hybrid funds to as per your investment objectives.

Is ULIP is a good investment?

If you are wondering ULIPS are the best investment option to help you meet your long-term goals like marriage, buying a new car, new house, etc.  As the money gets compounded the returns are usually on a higher side in comparison to other traditional methods like FDs (or not investing at all), it is better to invest in one of the best ULIP plans. But, it is ideal if you want to stay invested for a minimum of five years and reap the benefits of ULIP returns.

Things to Know About Unit Linked Insurance Plans or ULIPS?

What sets ULIP plans apart from other traditional investment schemes is that ULIP plans offer both the investment returns and insurance cover.

  • In the beginning, the ULIP premium goes towards meeting policy expense and your insurance needs
  • Then the premium is further divided between investment in mutual funds 9buying fund units) and life insurance cover
  • Investing in ULIP involves fund management charges, administration charges, premium allocation charges, and mortality charges

What is an Equity Linked Savings Scheme or ELSS Fund?

ELSS or Equity Linked Saving Scheme is a tax saving mutual fund scheme that comes with a minimum lock-in period of 3-years, and the returns generated are taxable. The money is invested in the capital market and in companies with different market capitalizations. ELSS funds invest mostly in stocks. You can pay through SIP or submit a lump sum amount to gain benefits. Based on the sum of investment and market conditions, your return can range from 14-20% per year.

ELSS funds over best returns in the long-term. It is not necessary to withdraw money soon after the completion of the waiting period, you can still continue to invest and reap benefits.

Things to Know About Equity Linked Savings Schemes (ELSS)

  • You can invest any amount in ELSS funds. However, the tax exemption limit is only Rs. 1.5 lakh. And the returns generated are not tax-exempted as per the recent budget.
  • The investment can continue even after the completion of the 3-years waiting period
  • It is a high-risk investment scheme in comparison to a PPF or Fixed Deposit but the returns are substantially higher ( which makes it perfect for high risk-appetite investors)
  • ELSS funds are the best investment options for people looking to invest in short lock-in period and potentially higher returns

ULIP vs. ELSS Comparison Table

Particulars

Equity Linked Savings Scheme (ELSS)

Unit Linked Insurance Plans (ULIP)

Returns 

Being market-linked, the returns depend on the scheme, but an investor can expect an approximate return of 12-14%.

The returns can vary because an investor can choose any combination of equity, debt, hybrid funds in his investment.

Lock-in period

3-years mandatory lock-in

5-years mandatory lock-in

Tax Computation

LTCG is taxed @ 10% above Rs. 1 lakh

Tax exemption under Section 80C ( but gains are taxable)

Liquidity

High

Low

Applicable Charges

Fund management charges  and exit load charges

Premium allocation charges, Policy administration charges, mortality charges, etc.

You can pick one that aligns with your risk appetite and future goals.

In a Nutshell

As you see the above ULIP vs. ELSS comparison, features and benefits of both from investment perspective, ELSS makes a better investment scheme in terms of tax benefits. And offer better market exposure to your capital. On the other hand, ULIPs are a good deal if you looking for life insurance cover with some investment benefits. Based on your financial goals and investment requirements you can choose to invest in any of them. Though ELSS have a lock-in of 3 years, the returns are better if you stay invested for 5 to 7 years.