ELSS vs ULIP – Key Difference Between ELSS and ULIP

Most of you must have heard of Equity Linked Savings Scheme (ELSS) and Unit Linked Insurance Plans (ULIP). Well, the only link between the two is that they are financial products and you can save income tax by investing in them. While ELSS is a pure equity mutual fund, ULIP is a more complex product that combines insurance and investment.

Differences between ULIP and ELSS

Features

The key parameter which differentiates these two is perhaps their nature. ULIPs are sold by insurance companies and offer the benefit of insurance coverage along with investment. If you opt for this plan, your premium will be partly used for life insurance, while the rest would be invested in stocks, bonds, or other instruments. Since ULIP is a life insurance policy, it offers death benefit If the insured dies during the term / duration of the policy, the nominee is paid the sum assured or fund value, whichever is higher. ELSS is a diversified mutual fund that invests in the stock market. It doesn’t offer insurance benefits and the full amount is used for investment purposes only.

Lock-in period

Another difference between the two is the lock-in-period. Although the lock-in period of ELSS is no more than three years, to enjoy the full benefits you may hold it for a longer period. As for ULIPs, the lock-in period is 5 years, but the investor should continue with the plan till the term of the policy to get better returns

Tax benefits

Which one is the better of the two when it comes to saving tax? Both these plans come with the benefit of deduction from taxable income up to 1.5 lakh, according to Section 80C. Long-term capital gains (LTCG) on ELSS is taxable on amounts exceeding Rs. 1 lakh a year. In the case of ULIPs, returns on maturity are exempt from income tax according to Section 10(10D) until 31 Jan 2021. As per the Budget 2021, If the annual premium of your new ULIP investment is more than Rs. 2.5 lakh the return that you will get will no longer be tax exempt and it will be taxed as per the equity mutual funds.

Switching option

If you are considering ULIP, you would have the option of changing the ratio of amounts invested in various instruments, such as debt and equity. In the long run, this benefit would be beneficial as it will allow you to change the mix of investments according to the risk acceptable at different life stages. For example, if you are young, you could invest higher proportions in equity. As you age, you should focus more on less risky avenues like debt. Also, if you expect the market to fall in the next few months, you can get out of equity and switch to debt. But it’s necessary to remember that you will be allowed only a limited number of free switches, after that you will have to pay a charge.

When it comes to ELSS, there is no such switching benefit, and you will not be able to change anything for three years. But if you want some income during the tenure of the ELSS, you can always choose the dividend option.

Conclusion

So, what’s the answer to the question about which is better - ELSS or ULIP? Well, that depends on your needs. If you would like to combine insurance and investment at the same time and can invest for a longer period, your best bet would be ULIP. Otherwise, ELSS is the way to go.