When it comes to tax-saving investments & creation of wealth, there are two most popular investment plans available, namely Unit Linked Insurance Plans (ULIPs) & Equity Linked Savings Schemes (ELSS). While comparing them, it becomes important to ascertain the impact of both plans on the tax benefits, returns, financial objectives, etc. A ULIP Calculator can be of great help in ascertaining the maturity value of the plan, depending on the premium amount, policy tenure, fund selection, & allocation of funds. Both plans have their own advantages, disadvantages, & differences, which we will be discussing in this article. Let’s go ahead.
What is ULIP?
ULIP offers a dual benefit of insurance & investments, where a part of the premium is allocated towards life insurance & the remaining part is invested in market-linked securities. In case of a sudden demise of the policyholder, the beneficiaries will receive the death benefit or the fund value, whichever is higher. In case the policyholder survives the policy, the policyholder will receive the fund value that would have been accumulated, depending on the fund’s performance.
What is ELSS?
Equity Linked Savings Scheme (ELSS) are a tax-saving mutual fund scheme that primarily invests funds in equity-oriented funds. This scheme offers the dual benefit of tax deduction under Section 80C of the Income Tax Act, 1961 & creation of wealth. Here, the funds are mainly invested in equities, which are best suited for investors seeking long-term wealth creation. To be precise 80% of the funds are invested in equity-oriented funds, & the remaining 20% is invested in debt. This investment plan helps mitigate market fluctuations while also creating wealth. The funds can be invested in ELSS through SIP or in a lump sum, making it an efficient & flexible plan that helps in tax planning.
Difference Between ULIP & ELSS
Provided are the differences between ULIP & ELSS:
| Basis of Difference | ULIP | ELSS |
| Investment Type | It offers the dual benefit of insurance & investment. | It is a pure form of investment, basically a mutual fund scheme. |
| Objectives | It includes life insurance coverage with returns on investment. | These are well-managed mutual funds which offer diversification of funds. |
| Returns | It allows for investment in debt, equity, or both, hence variable. | The returns are linked to the market, ranging from 12 to 14%. |
| Liquidity | Less liquid | Highly liquid |
| Regulatory Bodies | Insurance Regulatory & Development Authority of India | Securities & Exchange Board of India |
| Lock-in Period | 5 years | 3 years |
| Flexibility | It is flexible as it offers switching between the funds. | As the amount is invested in equity only, no switching between the funds can be done. |
| Risk Associated | Includes high risk as it includes market-linked securities, but life insurance coverage as well. | More risky as funds are wholly invested in market-linked securities. |
| Transparency | Less transparent, as it is difficult to ascertain where the funds are invested | Highly transparent, hence can receive a complete picture of where funds are invested. |
| Tax Implications | The premium paid is eligible for a deduction of tax u/s 80C, maximum up to INR 1.5 lakhs per annum, where the premium should not be more than 10% of the sum assured. The maturity proceeds would be exempt, but will be taxable if the premium amount exceeds INR 2.5 lakhs. | The amount invested is eligible for a deduction of tax u/s 80C, maximum up to INR 1.5 lakhs per annum. Long-term capital gains are exempt up to INR 1 lakh; above this, they will be taxed @10%. |
| Loyalty Additions | These can be availed in case you remain invested. | They are not applicable under ELSS. |
Benefits of ULIP
Provided are the benefits of the ULIP:
- Flexibility of Changing Life Cover:
This plan allows you to adjust the premium amount according to your comfort, which means the premium amount can be either increased or decreased. It helps in achieving an optimum coverage that best suits your future financial objectives.
- Availability of Premium Redirection:
This plan also allows you to change the type of fund to which you have redirected your investments, but only in the case of future investments. This option cannot be availed for the premium amount already redirected to date.
- Dual Benefits in One Package:
This plan offers the dual benefits of insurance & investments under one single plan, all for one single premium amount.
- Flexibility of Changing Life Cover:
This plan allows you to adjust the premium amount according to your comfort, providing you with optimal coverage to achieve your future financial objectives.
- Tax-free Payouts:
The death benefits received by your nominees are exempt from tax under section 10(10D) of the Income Tax Act, 1961, hence leading to savings.
Benefits of ELSS
Provided are the benefits of the ELSS:
- Lowest Lock-In Among Tax-Saving Investments
This plan has the lowest lock-in period of 3 years amongst the mutual fund schemes. This means an investor cannot withdraw funds earlier than 3 years; any premature withdrawal would attract penalties.
- Diversified Investments
It uses the concept of diversification of funds, which means the funds are not invested in one single stock. This means it spread across multiple stocks, across different markets & sectors, balancing the performance of one another.
- Disciplined Investing
As we know, equity-oriented funds are subject to market fluctuations, hence should be left for a longer tenure to reap better returns. Hence, this inculcates a sense of disciplined investing.
- Mandatory Lock-in Period Enables Growth
The mandatory lock-in period of 3 years leads to the growth of funds.
- Tax Benefits
This plan offers a deduction of tax on the amount invested, a maximum of INR 1.5 lakhs u/s 80C of the Income Tax Act, 1961.
- No Upper Limit
There is no upper limit in ELSS, which means you can invest as much as you can, subject to the risk acceptance level.
Conclusion
Both ULIPs and ELSS are tax-saving investment plans, but which one to choose will depend on your financial objectives, risk tolerance level, and your choice. Here, choice means whether you want a pure investment plan, i.e., ELSS or a combination of insurance and investment, i.e. ULIP.