Which is better: ELSS or ULIP

Both ELSS and ULIP are investment options you can consider in order to avail tax deduction under section 80C of the Income Tax Act, 1961. Both of these investments offer different return opportunities and have different risk categorization, but a mutual benefit of tax saving.

But even after this, there is a dilemma in the mind of an investor - ELSS vs ULIP. To make things easier, we have highlighted the features of both. Read more to find out.

What is ELSS?

An Equity Linked Savings Scheme is a type of tax saving mutual fund which invests primarily in shares of the stock market - equities. ELSS funds invest in capital markets and in companies with a large market capitalization. An ELSS has a minimum lock-in period of 3 years which is the shortest span for any tax-saving investment u/s 80C. What makes ELSS a tax saving mutual fund is that an investor can claim a tax deduction of up to INR. 1,50,000 against investments made in ELSS. As per the recent amendment, ELSS attract an LTCG tax of 10% post the lock-in period.

Salient Features of ELSS

●     You can start investing in an ELSS with a minimum amount of INR. 500 or a lump sum amount of any size. But a tax exemption of only up to INR. 1,50,000 can be claimed as per sec 80C of the Income Tax Act, 1961.

●     It is one of the best tax saving mutual funds which offers tax benefits with potentially higher returns and short lock-in periods.

●     The returns on Equity Linked Savings Schemes attract an LTCG tax of 10% whether it is dividend income or capital appreciation.

●     You have an option to reinvest the proceeds in any tax other saving mutual fund post the lock-in period.

●     ELSS funds come with a higher risk, but they also have a potential for generating high returns.

What is ULIP?

A Unit Linked Insurance Plan is an investment cum insurance plan offered by insurance companies. Under a ULIP plans, the premium is usually divided between  life cover and the remainder is invested in market linked investment funds. These funds can include equity, debt, hybrid, or money market funds through ULIPs. Investment in a ULIP can entitle you to a tax deduction of INR. 1,50,000 under Section 80C of the Income Tax Act, 1961. These plans have a lock-in period of 5 years and as an investor you can choose to switch from equity to debt or hybrid, as per your investment objective during the lifecycle of the investment. A ULIP is an excellent option for a long-term investment.

Salient Features of ULIP

●     ULIPs are different from traditional insurance plans as they invest in market linked securities and provide insurance cover at the same time.

●     When you invest in a ULIP, a part of your premium is utilised towards meeting your insurance. Once these expenses are met, the premium is divided between providing you a life cover and buying fund units for investment. The premium allocation charge is deducted upfront from the premium that you pay while other expenses are met through deduction of units or adjustment of the NAV.

●     The expenses involved in ULIP investment include premium allocation charges, administration charges, mortality charges, and fund management charges.

ELSS vs ULIPS

Distinction	Unit Linked Insurance Plan	Equity Linked Savings Scheme
Definition	An insurance cum investment plan	A pure investment scheme
Purpose	The fund’s purpose is to provide investment benefits along with tax relief and life coverage.	The fund’s purpose is to provide benefits from diversified equity investments along with tax relief.
Time Period	Minimum lock-in of 3 years.	Minimum lock-in of 5 years.
Return Rate	Returns depend on the combination of funds invested - equity, debt or hybrid.	Returns are market-linked, they are depended on the scheme invested with an average return rate of 15%-20%.
Tax Saving	The gains are tax-free. The invested amount offers tax deduction u/s 80c.	The invested amount offers tax deduction u/s 80c and the returns attract an LTCG tax of 10%.
Fund Charges	The expenses include charges like policy administration charges, premium allocation charges, mortality charges, etc.	There is an exit load and fund management charges.
Liquidity	You can liquidate your invest post the lock-in period subject to further policy conditions.	You can liquidate the entire investment amount post the lock-in period.
Regulator	IRDAI	SEBI
Switching	Switching between funds such as Equity, Debt, Hybrid, Balanced, or money market funds are allowed subject to certain charges from the fund house.	You cannot switch the fund under an ELSS as the entire amount is invested in equity related securities.
Risk	The risk associated with the investment part of the fund is high while life coverage is guaranteed.	ELSS is market-linked. It carries a higher risk but also a higher rate of return.
Transparency	ULIPs offers transparency as you are aware of where the money is being invested.	ELSS offers compete fund transparency as you can get all the details of your investment via a consolidated fund report.

Now that we have highlighted the basic difference between ULIP and ELSS funds, it is time to come to a conclusion. As an investor, if you are looking for a short-term equity investment with sizeable returns, then an ELSS is the perfect investment option for you. An ELSS is a best type of tax saving mutual funds and investing in one for a long time period is a good source of wealth creation.

On the other hand, if you have a specific family goal in mind, a ULIP is a better option as it provides insurance cover for you and your family. Additionally, you always have an option of switching the investment fund in order to add value to your investments without taxation.

Thus, the only thing you should keep in mind while facing a ULIP vs ELSS dilemma is your financial goal, investment objective and the life stage. Then accordingly, you can choose the one suitable for you.