ELSS vs ULIP: What should be your preferred income tax saving option?

Unit Linked Insurance Scheme (ULIP) and Equity Linked Savings Scheme (ELSS) are two of the best income tax saving option. By investing in both of them, you can save some valuable amount of tax money.

But what if you don’t want to invest in both? What if you first want to have an in-depth knowledge of the two and then decide? To answer these exact questions, we’ve come up with a complete guide to tax saving by investment in  ELSS and ULIP.

what-is-ELSS

what is ELSS?

ELSS is a very widely invested mutual funds scheme. ELSS funds, because the investment is exempted under section 80C, are considered as the best tax saving vehicle. The scheme invests in the capital markets and at the same time save taxes both on the investment and the returns generated. Investors can claim tax deductions of up to ₹150,000, by investing in ELSS but it also carries a mandatory lock-in period of three years. It might come off as a surprise but the three-year lock-in period is the shortest span for any tax-saving investment u/s 80C.

Although ELSS can give you great returns, the fact that your entire corpus here is invested in equities or equity-related products, the returns are highly volatile and mainly suitable for high-risk tolerant investors. (For someone not wanting to take the high-risk route, SIPs can be a better option.) Something to note in the case of ELSS investment is that after the announcement of Long-term capital gains (LTCG) tax in the Union Budget 2018, which became effective from April 1, 2018, redemption, profits above Rs 100,000 from ELSS funds will be taxed at 10%.

Features of ELSS

  1. You can invest any amount you like in an Equity Linked Savings Scheme. But can claim deductions of only up to INR 1,50,000.
  2. You can continue to invest in this scheme even after the completion of the 3 years lock-in period.
  3. Even though the risk involved with ELSS is higher when compared to a Fixed Deposit or a PPF, the potential returns are higher as well.
  4. Switching of funds is not allowed in ELSS.

what-is-ulip

what is ULIP then?

ULIPs are provided by various insurance companies and they’re generally referred to as insurance-cum-investment products. This product gives the dual benefit of investment opportunity along with Insurance coverage. One part of the investment paid is used for ensuring the investor while the second part goes into funds for generating returns. Investors can choose to invest in equity, debt, hybrid, or money market funds through ULIPs. A tax deduction up to 1,50,000 can be claimed for ULIP investments, under section 80C of the Income Tax Act.

The investment has a lock-in of five years and even if the premiums are stopped or the investor decides to surrender the policy, the payout is released only after the lock-in tenure is completed.

Features of ULIP

  1. Given the fact that ULIPs offer both protection of insurance and the power of investment, it sets them apart from traditional investment policies.
  2. 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 a life cover and buying fund units for investment.
  3. The expenses involved in ULIP investment includes premium allocation charges (capped at 2.25%), administration charges, mortality charges (which reduces on a year-on-year basis), and fund management charges (capped at 1.35%).
  4. Although an investor can switch funds, say, from equity to debt or hybrid, during the lifecycle of the investment, it’s chargeable and also the number of times one can switch is limited.
  5. ULIPs, like generic insurance policies, offer death benefits. This means that in case of your demise, your nominee will be liable to receive the sum assured or the fund value, whichever is higher.

Comparison between ELSS & ULIP

ParameterEquity Linked Savings Scheme (ELSS)Unit Linked Insurance Premium (ULIP)
RegulatorSEBIIRDA
Lock-in3 years5 years
Tax benefitsLTCG under ELSS is taxed at 10% over and above Rs. 1,00,000Offers tax deductions under section 80C but gains are taxable
TransparencyFull transparency with respect to not only the details available with stocks but also the total quantum of stocks held by the fundLacks transparency as there’s no news of where your money is getting invested
ChargesOnly one charge – Expense Ratio. And even this is adjusted in the NAV of the scheme and not charged separatelyMultiple charges premium allocation, mortality, policy administration, etc., and these are pretty complex too
Risk factorHigh risk and high returns but returns not guaranteedHigh risk and high returns but return not guaranteed. However, life cover is guaranteed
Fund SwitchSwitching of funds not allowedProvision for switching of funds

 

To Conclude.

ELSS offers short-term investment horizon through pure equity investment; hence, if your objectives are similar, then go for ELSS. Even though expected returns from equity markets are comparatively higher do remember that equity investments demand long-term perspective, for maximum benefits.

Alternatively, if you’ve long-term goals such as child education, marriage etc., go for ULIPs. Staying invested in ULIPs for a period of 10-15 years have proven to give handsome returns. Plus, you’re getting insurance coverage as well. Hence, the decision of your best tax saving option should not only be based upon your financial planning and investment objective but also your life stage.

 

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