ELSS vs ULIPs – Which Is Better Tax Saving Option?

When it comes to tax-saving investments, unit-linked Insurance plans (ULIPs) and equity-linked savings schemes (ELSS) are two popular options. Both ULIPs and ELSS offer tax benefits under Section 80C of the Income Tax Act of 1961, making them attractive investment choices. However, there are key differences between these two products that investors need to consider before making a decision.

ULIPs and ELSS: Type and Features

The primary difference lies in the type and features of ULIPs and ELSS. While ELSS is solely a mutual fund, ULIP is a combination of insurance and investment. A ULIP is offered mostly by insurance companies and provides a death benefit to the investor’s nominee based on the sum insured or the value of the mutual fund units in the ULIP. On the other hand, ELSS provides the complete value of the fund at the time of redemption.

Investment Objectives

The ELSS aims at corpus building like most equity funds, with a recommended minimum investment period of 5-7 years for better returns. On the other hand, ULIPs aim to provide life coverage along with some capital appreciation. It combines insurance and investment into one product.

Risks

The ELSS is considered a high-risk investment as it allocates a significant portion of its funds to equities. In comparison, ULIPs are less risky because they offer policy coverage even if the fund returns are not favourable. The risk factor of ULIPs depends on their asset allocation, which can include equity, debt, or hybrid funds.

Returns

The ELSS invests the entire amount paid by investors into fund units, while a ULIP allocates a portion of the investment for insurance premiums. As a result, ELSS has the potential to deliver higher returns than a ULIP. The returns on ULIPs vary depending on the type of fund and can range from 6-17%.

Tax Benefits

Both ULIPs and ELSS offer tax benefits under Section 80C up to Rs. 1.5 lakh in a financial year. However, after the lock-in periods of 3 years for ELSS and 5 years for ULIPs, the gains are subject to tax. Returns from ELSS are taxed as per equity funds, while ULIP returns are taxed according to the new norms under 8AD from February 1, 2021.

Liquidity

The ELSS offers more liquidity compared to a ULIP due to its shorter lock-in period of 3 years. This makes ELSS a preferred choice among investors who want flexibility with their investments. On the other hand, ULIPs have a lock-in period of 5 years and do not allow premature withdrawal.

Switching Option

One key advantage of ULIPs is the switching option available for asset classes. Investors can choose different types of funds within their ULIP during the investment cycle. In contrast, ELSS is primarily an equity fund with no option for switching to different types of funds.

Expense Ratio

The expense ratio is an important consideration when investing in mutual funds. The ELSS generally has a lower expense ratio ranging from 1.35% to 2.5%, while ULIPs typically start with an expense ratio of around 2.25%. Additionally, ULIPs have other charges such as switching charges, agent commissions, renewal expenses, and premium allocation charges.

It is important to note that while ELSS offers predictable costs and transparent returns, ULIPs may lack transparency due to additional charges. However, new-age ULIPs are trying to reduce costs and offer benefits such as loyalty points and wealth boosters.

ULIP Calculator

Are you unsure about how to effectively save taxes while securing your financial future? Both ELSS and ULIPs can help you achieve your goals. However, understanding the differences between these two tax-saving instruments can be overwhelming. This is where a ULIP calculator comes in handy. A ULIP calculator helps you make an informed decision about your investments by comparing various ULIP plans and calculating the returns. 

Using a ULIP calculator, you can calculate the maturity amount based on your investment tenure and expected returns. Similarly, you can assess the potential growth of your investment in an ELSS fund over the same period. You can assess the potential returns and tax benefits associated with each option based on your financial goals by using a ULIP calculator. 

Conclusion

Both ULIPs and ELSS are tax-saving investment options that offer distinct features and benefits. Understanding your financial goals and risk tolerance is crucial when deciding which option is better for you. While ELSS provides higher liquidity, potential for higher returns, and transparent costs, ULIPs offer life coverage and the flexibility to switch between funds.

As you navigate through your financial journey, consider consulting with a financial advisor to assess your investment needs and make an informed decision. Remember to evaluate your risk tolerance, investment horizon, and tax-saving requirements before choosing between ULIPs and ELSS. You can pave the way towards a financially secure future by aligning your investment strategy with your financial goals.