Investing in mutual funds and other schemes is a popular way to grow wealth in India. Two of the most popular types of investment schemes are Equity-Linked Savings Scheme (ELSS) and Unit-Linked Insurance Plan (ULIP). While both of these investment options are eligible for tax deductions under Section 80C of the Income Tax Act, they differ in terms of charges, liquidity, returns, lock-in period, and tax treatment. In this article, we will explore the differences between ELSS and ULIP and help you make an informed decision.
What is ULIP?
ULIP is a combination of insurance and investment. ULIP plans allocate premiums to investments in equity instruments, debt instruments, money market instruments, government securities, bonds, and similar financial instruments. A part of money is used to protect the investor and the rest is invested in the products of his/her choice. The lock-in period for ULIPs is five years.
What is ELSS?
ELSS is a diversified equity mutual fund. The scheme invests in the capital market and select companies with different market capitalisations. ELSS funds come with a mandatory lock-in period of three years.
Differences between ULIP And ELSS
ULIPs have higher charges than ELSS. The charges in ULIPs include premium allocation charges, policy administration charges, mortality charges, fund management charges, and surrender charges. On the other hand, ELSS has lower charges as compared to ULIPs. ELSS have expense ratio charges.
ELSS has higher liquidity than ULIPs. ELSS has a lock-in period of three years, while ULIPs have a lock-in period of five years. After the lock-in period, investors can withdraw their money from ELSS without any penalty. However, in ULIPs, if an investor surrenders the policy before the lock-in period, he/she may have to pay surrender charges.
ELSS has the potential to generate higher returns than ULIPs, because ELSS invests in equity, which has the potential to generate higher returns in the long run. On the other hand, ULIPs invests in both equity and debt instruments like money market instruments, government securities, bonds, and similar financial instruments, which may not generate higher returns as compared to ELSS.
- Tax treatment - ULIP vs. ELSS
Both ULIPs and ELSS are eligible for tax deductions under Section 80C of the Income Tax Act. Investors can claim tax deduction of up to Rs. 1,50,000 against ELSS investments. On the other hand, a contribution of up to Rs. 1,50,000 can be claimed as a tax deduction under Section 80C: the returns are totally exempted from tax U/S 10(10D) of the Income Tax Act against ULIPs. However, if the insurance premium exceeds Rs. 2.5 lakh for any of the previous years, then the amount received at the time of maturity is taxable.