ELSS vs ULIP: What should be your Preferred Tax-Saving Option?

Written by : Knowledge Centre Team

2021-03-08

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Buying a house, getting married, ensuring a great future for your child and visiting a new country are some of the most popular life goals you can have. These are the "life goals" or milestones you strive to achieve.

To achieve all these goals, investments are necessary. Investing in tax-free options, though not mandatory, can help you efficiently achieve your goal. Tax-saving investments are not a life goal, but they can help you reduce taxes, which can help you save more for your goals.

These are the investments that are eligible for deductions u/s 80C of the Income Tax Act 1961. If an investment qualifies under this section, then you will be able to avail a deduction of up to Rs 1.5 lakhs towards the premium you pay.

ULIPs and Equity-Linked Saving Schemes (ELSS) are some of the most popular tax-saving options available in the market.

When to Use ELSS?

An Equity Linked Saving Scheme, or simply ELSS, is a type of mutual fund that invests a major proportion of the funds in equity and related schemes. ELSS has at least 65% of the fund invested in equity-related securities, while some of the contributions are in fixed investments.

This is the only type of mutual fund that is eligible for deductions u/s 80C. ELSS has a short lock-in period of just 3 years.

Since the equity contribution is very high, it is a more risky investment, but at the same time it has the potential to earn you great returns and help fulfil your goals.

You can invest in ELSS if your risk appetite is high enough, i.e., you can tolerate an investment with high volatility and have a goal that has a timeline of 3 or more years. Thus, you can look to achieve your medium-term goal with your ELSS.

These can be the following

a) Buying a car
b) Purchasing a ring for your wife
c) Planning an overseas trip

The longer you hold your ELSS scheme, the better are the chances of you getting higher returns.

When to Use ULIP?

A unit linked insurance plan is a life insurance variant that also offers you an opportunity to invest in the market. With ULIP plans, you get both insurance and investment in a single product. ULIPs are not only eligible for tax-savings u/s 80C of the Income Tax Act but also u/s 10(10)D.

ULIPs have a lock-in period of 5 years. During this period you cannot make any withdrawals, and if you do, you will lose a lot of money. Thus, the ULIP plan is perfect to cater to your long-term goals, which have a timeline of at least 5-10 years or more. The longer you stay in ULIP, the more time you will allow your investments to grow and help you create a good corpus.

ULIP plans such as Canara HSBC Life Insurance’s ULIP, Invest 4G, can help you achieve the following goals.

a) Buying a home
b) Having a successful life post-retirement
c) Ensuring a good education for your child
d) Leaving a legacy for your children/grandchildren

ELSS vs ULIP

We have now seen that both these investment options have some similarities. These can both help you save taxes and are linked with the market. But despite these points, they also have a lot of differences.

Let us look at the difference between ELSS and ULIP with the help of a table:

Features	ELSS	ULIP
Investment Portfolio	Equity heavy portfolio. An ELSS fund has a minimum of 65% of equity stocks. Generally, ELSS funds have 80-85% of equity,	In a ULIP, you are given full freedom to decide how much of your money will be invested and in which fund. Thus, you can choose to invest in the following equity and debt as per your preference - Equity Funds - Debt Funds - Hybrid
Lock-In Period	ELSS have a lockin period of 3 years	ULIP plans have a lockin period of 5 years
Tax savings	ELSS is eligible for deduction of up to Rs 1.5 lakhs u/s 80C	Tax deductions of up to Rs 1.5 lakhs u/s 80C available. Tax-exemption also available on maturity amount u/s 10(10)D
Tax on Maturity/ Withdrawals	LTCG tax @ 10% if the gains exceed Rs 1 lakh.	Returns can be taxable if the premium you pay exceeds Rs 2.5 lakhs per year.
Charges	ELSS funds involve charges such as exit-load, management charges.	ULIPs involve charges such as: - policy administration charge - fund management charge - premium allocation charges - mortality charges, etc.
Expense Ratio	It has a low expense ratio in the range of 0.5% to 1.5%	Charges are capped at 1.35%
Life Cover	No life cover is present	Life cover is provided in ULIPs. The death benefit is payable to the family at the time of your death
Bonuses	Not present	Bonuses present in policies such as Invest 4G - Loyalty Additions - Wealth boosters
Flexibility in Investment	You can either invest in a lump sum or through SIP	Freedom to choose your mode of premium payment and the duration
Withdrawals	After 3 years	After 5 years
Switching	Not allowed	Fund switching is allowed

Both ULIPs and ELSS have their sets of advantages and shortcomings. They can help you at different times. This is a great option if you are willing to take risks and want to save taxes. ELSS are more transparent and involve fewer expenses. Thus ELSS can be considered if you want an out-an-out investment option that can help in achieving shortly to medium-term objectives

ULIPs on the other hand offer tax-benefit, both in premium payment as well as maturity/death benefit. It includes a life cover that ensures your family remains financially protected even after you are not with them.

Invest 4G – A ULIP to Consider

Canara HSBC Life Insurance’s ULIP, Invest 4G is an online ULIP plan that can help you raise a good corpus as well as cover for your life. It gives you full freedom to decide the funds in which your money will be invested. You can even shift your money between funds if you like.

Invest 4G offers you 4 different automatic portfolio management strategies, that help you to minimize your risk without getting involved much. It also has a premium funding benefit that waives the remaining premium at the time of your death.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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