In India, ELSS and ULIP are two popular ways to invest that can help you save on taxes under Section 80C. Both are good for you, but they work in very different ways.
Investing in stocks through ELSS is like a mutual fund, but you might get better returns. Let’s discuss ULIP Vs ELSS in detail.
What is ULIP?
Unit Linked Insurance Plan, or ULIP, is a type of insurance that combines investment and health insurance into one plan. A ULIP premium is split into two parts.
The first part pays for life insurance, the second is invested in market-linked funds like equity, debt, or hybrid funds. The features of ULIP make it perfect for people who want insurance security and market-based returns.
Advantages of ULIP
Here are some key advantages of ULIPs that make them a popular long-term investment option:
| Life Coverage | ULIPs are unique because they offer both investment rewards and life insurance coverage. This means your family will be cared for financially if something bad happens. |
| Wealth Creation | ULIPs are long-term investments that help people get rich over time. Some of your premiums are put into market-linked instruments, which could give you good profits. |
| Tax Benefits | Under Sections 80C and 10(10D) of the Income Tax Act, ULIPs offer two types of tax breaks. If you pay up to ₹1.5 lakh in fees, you can deduct them under Section 80C. |
| Being Flexible | One of the best things about ULIP is that it gives buyers much freedom. If the market changes, you can switch between stock, debt, and balanced funds. |
| Loyalty Benefits | Some ULIPs give loyalty bonuses or extra units to buyers who have been with the plan for a long time. After staying invested for a certain amount of time, these perks are added to the value of your fund. |
Disadvantages of ULIP
Let’s discuss the disadvantages of ULIP:
| Charges | Extra charges come with ULIPs, such as fund management fees, mortality charges, and payment allocation costs. These fees are taken out of your premium, which can reduce the amount you spend. |
| Long Lock-in Period | ULIPs are less open than many other choices because they require you to stay with the plan for five years. You can’t get your money out during this time, not even in an emergency. This makes it harder to get cash, so buyers who need quick access to their money might not like it. |
| Market Risks | The money you get back from ULIPs depends on how well the stock or bond markets do. It’s possible to make a lot of money, but it’s also possible to lose a lot. Before putting money into a market-linked plan like ULIP, investors should consider how much danger they are willing to take. |
What is ELSS?
A joint fund called Equity Linked Savings Scheme (ELSS) invests primarily in stocks and offers tax breaks under Section 80C of the Income Tax Act. Due to many features of ELSS, it is a good choice for people who want to build wealth through stock purchases while saving on taxes.
Advantages of ELSS
Here are the advantages of ELSS:
| Tax Savings | People can deduct ELSS contributions under Section 80C of the Income Tax Act. You can get up to Rs. 1.5 lakhs back each financial year, reducing your tax liability. |
| Shorter Lock-in Period | The ELS only ties you in for three years, shorter than other tax-saving options. This gives you additional possibilities and cash because your money won’t stay long. |
| Higher Returns | ELSS invests largely in stocks because it expects superior long-term returns. Returns vary with the market, but they frequently outperform other savings methods. |
Disadvantages of ELSS
ELSS can help with taxes and produce significant returns, but purchasers should consider its drawbacks before investing. The following are the disadvantages:
| Market Risk | As ELSS funds mostly invest in stocks, their success depends on stock market changes. They may get better returns, but investors are vulnerable to market changes. |
| No Life Coverage | The lack of life protection in ELSS is a major issue. ELSS is a financial tool that doesn’t cover the investor’s family if they die. |
| No Flexibility | Switch between stock and debt funds in ULIPs. This inflexibility can cause problems in unstable markets or when financial goals change. |
Main Differences Between ULIP and ELSS
For a better understanding of ULIP Vs ELSS, the following table shows the key differences:
| Particulars | Equity Linked Savings Scheme (ELSS) | Unit Linked Insurance Plans (ULIP) |
| Objective | ELSS offers the potential for higher long-term returns while helping you save under Section 80C. | ULIP offers investment returns with tax relief and life coverage. It’s a dual-benefit plan that helps build wealth while securing your family’s future. |
| Returns | Market-linked, typically 12-14% returns. These returns can outperform traditional savings options but come with higher risk exposure. | Your earnings will depend on the market’s performance and selected investment mix. |
| Lock-in Period | 3 years | 5 years |
| Liquidity | High | Low |
| Charges | Fund management and exit load charges | Premium allocation, policy administration, mortality charges, etc. |
| Regulator | SEBI (Securities and Exchange Board of India) | IRDA (Insurance Regulatory and Development Authority) |
| Loyalty Additions | Not applicable | Loyalty additions are offered to stay invested longer. |
| Transparency | Investors can track funds regularly. | Fund managers manage investments, reducing direct investor control. |
| Risk | High-risk due to equity exposure. | Market risk exists, but life insurance provides an additional benefit. |
ULIP Vs ELSS: Which is Better?
An investor’s financial objectives and risk tolerance will determine which ULIP vs ELSS is better. ELSS might be better if you want to save on taxes, have more cash, and don’t need insurance.
ULIP, on the other hand, is a plan that can help people who want insurance coverage and investment opportunities.
It has the potential for high returns, tax benefits, and a shorter lock-in time.
Making a Well-Informed Choice
ULIPs and ELSS are ways to save money, but they do different things. ULIP is a good choice for investors who want to get protection and make money at the same time. But ELSS is better if you want market-driven gains with tax breaks and a lot of cash. Choosing the right financial product is easier if you know the difference between ULIP and ELSS and consider your investing goals. This can be done by learning about the top investment plans to grow your wealth.
