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There is a host of investment avenues that qualify for tax deduction under section 80C of the Income Tax Act, 1961. Two of the most popular tax-saving products available in the market today are Unit Linked Insurance Plans (ULIPs) and Equity Linked Savings Schemes (ELSS). While they are both market-linked tax saving instruments, they serve totally different purposes.Let us understand how ELSS and ULIPs differ from each other.
Unit Linked Insurance Plans
ULIP is a popular plan that combines the features of insurance and tax-saving schemes. ULIPs are thus, specially designed investment-cum-insurance products. When you choose ULIPs, one part of your investment (in the form of premiums) shall be used to provide you with insurance coverage, while the other part shall be allocated in funds of your choice- debt-oriented, equity-oriented, hybrid, etc.
Equity Linked Savings Schemes
Equity Linked Savings Schemes are diversified equity funds that reduce your tax burden by offering tax benefits on investment. Simultaneously, you can also reap the benefits of higher returns generated through equity investments. ELSS are required to hold at least 80 percent of their portfolio in equity instruments.
ULIP vs ELSS
| Point of Difference | ULIP | ELSS |
| Investment Objectives | ULIPs help investors fulfill several investment objectives such as insurance, investment, and tax-saving. | An ELSS helps investors achieve capital appreciation along with tax benefits. |
| Lock-in Period | ULIPs have a mandatory lock-in period of 5 years. | ELSS funds have a mandatory lock-in period of 3 years. |
| Tax Implication | Investments in ULIPs are subject to a tax deduction under section 80C up to a maximum of 1.5 lakh per annum. | Investments in ELSS are subject to a tax deduction under section 80C up to a maximum of 1.5 lakh per annum. |
| Switching | Switching between funds such as debt-oriented, equity-oriented, hybrid, money market, etc. is allowed. However, the maximum number of switches and switching charges depend on the ULIP provider. | No switching is allowed during the lock-in period. |
| Regulating Body | Insurance Regulatory and Development Authority (IRDA) | Securities and Exchange Board of India (SEBI) |
| Risks Involved | ULIPs are considered to be risky. Unlike many other tax-saving products, the returns and capital appreciation are not assured but life coverage is guaranteed. | ELSS are also considered to be a risky investment class as the returns and capital appreciation are not assured. ELSS investments are exposed to volatility risks. |
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Charges | Charges are capped at 2.25% for policies with tenure of 10 years and more than 10 years, and a maximum of 3% for others. | Fund management charges vary from fund house to fund house and scheme to scheme. |
In Conclusion
Thus, as one can see through this table, both ELSS and ULIPs have their pros and cons. Investors must consider their investment objectives, risk appetite, expected returns, and liquidity needs before choosing between ELSS and ULIP.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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