ELSS vs ULIP for Tax Saving: Which is Better?
In today’s time, everyone wants to make better profit from their money, so they keep looking for products where their investment is safe and at the same time make profit in some way or the other. Now, if there is a profit, it will also attract income tax.
In this article, we will try to find out which is better investment product for tax saving purpose – ELSS or ULIP.
What is ELSS?
ELSS means equity linked savings scheme. It is also known as the mutual fund which saves tax. It provides income tax exemption under Section 80 C of the Income Tax Act on investments up to Rs. 1.5 lakh.
Amongst all tax saving schemes under 80 C such as PPF, insurance schemes, etc; ELSS yields the highest returns along with income tax benefit.
Money is invested in the market. No matter how much money a person wants, income tax exemption is only up to Rs.1.5 lakhs.
What is ULIP?
Insurance covers risk. Insurance here means unit linked insurance plan (ULIP). ULIP works in two ways. Part of the money paid as premium gives the person insurance cover, and the rest is invested in funds such as debt, equity or both, which are operated by fund managers.
It also provides the facility to change funds called fund switching or portfolio change.
Its return is considered to be better than the rest of the insurance product.
Whatever money is paid as premium in ULIP is exempted from income tax under Section 80 C of the Income Tax Act.
Which is better ELSS or ULIP to save income tax?
It is important to compare the two at different levels.
Product Feature – ULIP offers two primary features insurance and investment; whereas ELSS is completely investment. The purpose of investing money in ELSS is to get good returns on investment. Although many products are available in the market under insurance, investment in ULIP is made only when the person wishes for good returns with insurance.
Lock-in period – Lock-in period is the time limit within which investment money cannot be withdrawn. While the lock-in period of ULIP is five years, it is only three years for ELSS. This means that ELSS has the facility to liquidate money more quickly, which allows it to reinvest by changing funds every three years.
Facility to invest money – Money in insurance is invested as premium which has to be given to the insurance company continuously at a certain interval as long as the policy continues. It allows payment of premium once a year, twice, four times or every month. Similarly, when it comes to ELSS, investment can be started with a small amount and money can be deposited at any time as per your convenience. If you want to invest in a regular manner, SIP can be resorted to. SIP means systematic investment plan. In this, the investor keeps investing a certain amount in his scheme within a stipulated time.
The medium of investment of money – The money in ULIP is invested in debt, equity or both. But in ELSS, money is invested entirely in equity, which gives good returns. Investing money in a debt provides fixed income, and keeps investors money safe, while investing money in equity means investing money in the stock market.
Additional expenses on investment money – Insurance company applies variety of charges to manage ULIP such as charge of issuing policies and distributing units, charge of managing funds, funds switching charge, charges for paperwork to manage the policy, charge of compensating the insurance company if it survives below the estimated age of the insurance company, charge if the policy is surrendered. This reduces the actual money invested. When it comes to ELSS, it takes only one charge called fund management fee or expense ratio. There is a risk in the stock market but the returns are also good accordingly.
Transparency – The money invested in ELSS deducts 3% of the fee, and the rest of the money is invested in funds. With this transparency, it can be ascertained how much money has been invested and how much returns have been received from it. Money is invested after removing a variety of charges in the same second and ULIP. This fee is higher in the initial years which later decreases. For all these reasons, there is no transparency and it is difficult to find out exactly how much money has been invested.
Also check out: ELSS vs NPS: 26 Differences
When surrendering before lock-in period
ELSS has a lock-in period of three years during which money cannot be withdrawn as mutual fund units are purchased with money that has a lock-in period of three years. Investing in equity does not tax long-term capital gains. Therefore, there is no tax on the investment made and the benefits thereof.
Insurance cover is first withheld if the policy is sundered during the lock-in period in ULIP. Whatever tax benefit swells with the ULIP in the meantime, it reverses and is taxed again. The surrender value of the policy is received after five years and that too after deducting various charges. Maturity benefit in ULIP is tax free only if the policyholder dies.
The whole thing that we see together is that both ELSS and ULIP save taxes and both invest money. Whether we need insurance for ourselves or investment depends on our objective as there is a difference between the operation and the rules of both. One only increases money and the other gives insurance to life along with the money but less.
If investors’ objective is both insurance and returns; you should take a term insurance plan at a much lower premium and also take advantage of higher returns by investing money in ELSS. Term insurance also exempts income tax under 80 C like the various insurance types. When it comes to returns, ULIP or ELSS, both start giving better returns in a span of ten to fifteen years. Therefore, after the lock-in period, both should not be left out and the money should be allowed to grow by giving time.
I am Nikesh Mehta, owner and writer of this site.
I’m an analytics and digital marketing professional and also love writing on finance and technology industry during my spare time. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected] or LinkedIn profile.