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ULIP vs ELSS

A ULIP is a Unit Linked Insurance Plan while an ELSS is an Equity Linked Savings Scheme. Both of these monetary instruments are a lucrative form of investment. But, selecting the appropriate one will more or less depend upon your financial goals. To help you understand better, we have carefully distinguished between the two.

What are ULIPs?

ULIPs or Unit Linked Insurance Plan, is a scheme which provides the dual benefit of investment and savings. That is, a part of the premium which you pay will be invested in funds while the remainder will be utilised for providing life cover. The policyholder can select the different type of funds where the investment should be put - equity, debt, hybrid or money market funds. A ULIP investment is usually a long term investment with a mandatory lock-in period of 5 years. You are entitled to funds switching as per your investment objective and strategy. Additionally, you can claim tax deductions for the premium paid towards a ULIP of up to ₹150,000 as per the Income Tax Act, 1961.

Fun Facts about ULIPs

  • ULIPs are completely different from traditional investment policies as they are a combination of investment and insurance.
  • During the initial years of policy tenure, the premium is utilised for meeting insurance cover and policy expenses. During the latter years of the policy, the premium is split between investment in funds and the remainder in life cover.
  • The additional expenses under a ULIP scheme include mortality charges, fund management charges, administration charges, surrender charges and premium allocation charges.

What is an ELSS?

ELSS or Equity Linked Savings Scheme, is a tax-saving diversified equity fund which invests the entire sum in capital markets and equity related instruments. They offer a dual benefit of tax-saving and wealth creation. ELSS mutual funds have the shortest lock-in period of 3 years in comparison to other monetary instruments and funds. Additionally, you can avail tax benefits of up to ₹1,50,000 under Sec 80C of the Income Tax Act, 1961.

Fun Facts about ELSS

  • There is no limitation on the investment amount. You are free to invest any sum into an ELSS as a lump sum or via SIP.
  • It is the best option available for investors who want to avail tax benefits along with higher market linked returns within a period of 3 years.
  • You can stay invested post 3 years of the lock-in period.
  • Provides higher returns in comparison to Fixed Deposits (FDs) and Public Provident Fund.

Which is Better, ULIP or ELSS?

CriteriaULIPELSS
TypeInvestment cum Insurance SchemePure Investment Plan
Lock-in Period5 years3 years
LiquidityPost lock-in period, option of partial withdrawalPost lock in period, no option of partial withdrawal
Tax BenefitsTax benefits as per Sec 80C of the Income Tax Act, 1961. Tax on returns it added only if the annual premium is 10% of the Sum Assured. 10% Long Term Capital Gains Tax is applicable if the returns are over ₹1,00,000/-
ReturnsThe returns vary depending upon the choice of investment funds - equity, debt or hybrid. Returns are market linked and the risk ranges from moderately high to high. Expected returns: 15%-17%.
ChargesFund management, administrative, premium allocation, mortality charges, etc.Exit load and Fund Management Charges.
RegulatorInsurance Regulatory and Development Authority of India.Securities and Exchange Board of India.
Funds SwitchingLimited to 4 per financial year, charges applicable post the limit.None, offers only SIP or lump sum mode of investment.

Why Invest in ULIPs?

Higher Returns

New generation ULIPs are not as expensive as traditional ones and some of them even offer higher returns in comparison to mutual funds. A ULIP allows an investor to switch between different investment funds - equity, debt or hybrid. Based on your risk appetite, you can select the investment style. Equities is a suitable option if you are aggressive and can handle high risk. Similarly, if your risk appetite is low, you can select debt funds. The same applies in case of risk-aversion and hybrid balanced fund. Additionally, if you are not happy with the performance of the fund, you can switch the entire fund and revise your investment portfolio.

Life Cover

Investment along with life cover is one of the best types of funds that any investor can hold in their portfolio. If not you, life cover is essential for your spouse and children. This is covered under ULIPs. Thus, in your absence or unfortunate demise, the life cover and investment will help your family avoid financial constraint. The sum assured can be utilised to meet all sorts of expense such as medical bills, education expenses, loan repayment, etc.

Long-term Growth

Since ULIPs come with a long term investment horizon of 10-15 years, you have the option to gain the advantage of long-term growth. The benefit of long-term investment is that your money is invested in the market for a longer tenure which will result in higher market-linked returns.

Tax Benefits

Premiums paid towards a ULIP scheme are eligible for tax deductions as per Sec 80C of the Income Tax Act,1961.

Why Invest in ELSS?

Tax Benefit

The primary reason to invest in ELSS is to avail tax benefits of up to ₹1,50,000 as per Sec 80C of the Income Tax Act, 1961.

Lock-in Period

ELSS mutual funds have the shortest lock-in period (3 years) in comparison to other financial instruments. This is a good investment option for earning good returns over a period of 3 years.

Growth Potential

Not only do these funds offer higher returns but you have an option stay invested post the mandatory 3 years lock-in period.

FAQs on ULIP vs ELSS

Can I stop ELSS before 3 years?

Yes, you can stop your ELSS investment before three years but the amount invested can only be withdrawn post the mandatory lock-in period of 3 years.

Can I withdraw ELSS before 3 years?

No, you will have to wait for the mandatory 3 years lock-in period to get over in order to make a withdrawal.

Is dividend from ELSS taxable?

Yes, dividends from ELSS are taxable as per the Dividend Distribution Tax of 10% on LTCG over ₹1,00,000.

Is ELSS better than PPF?

Yes, ELSS offers better returns over a long run in comparison to a Public Provident Fund.

Is ELSS safe?

No, ELSS is a market-linked instrument which comes with a high risk and high returns.

Is it good to invest in ELSS?

Yes, if you want to gain the double benefit of tax saving along with wealth creation, the ELSS is an excellent investment option.

Is ULIP a mutual fund?

No, a ULIP is completely different from a financial instrument.

Is ULIP better than mutual fund?

Yes, a ULIP provides higher returns along with the benefit of life cover, which is absent in an ELSS plan.

Is ULIP good for long term?

Yes, a ULIP is designed for a long term investment horizon of 10-15 years in order to generate good returns.

Is ULIP a good investment?

Yes, a ULIP not only provides good investment returns, but also life cover for you and your family.

Is ULIP return taxable?

Yes, only if the annual premium is 10% of the Sum Assured.

What is difference between SIP and ULIP?

A SIP is a Systematic Investment Plan is a mode of investment wherein you put money regularly into a mutual fund. A ULIP is an investment cum insurance fund. The major difference between a ULIP and a SIP is that a ULIP offers life cover while a SIP offers doesn’t.

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