February 10, 2025
6 mins read
ULIP and ELSS are financial products that may provide tax-saving benefits subject to applicable tax regulations. While ELSS is focused on creating wealth through equity, ULIPs are focused on protection and investment.
Equity Linked Savings Schemes (ELSS) and Unit Linked Insurance Plan (ULIP) are financial products with tax advantages and investment growth prospects. Different investors should be aware of their nature, purpose and risk exposure, as they vary in structure, goals and exposure to risks, and hence they differ.
ULIP is a combination of insurance cover and investments that are tied to the market. ELSS is designed to provide tax deduction benefits ELSS is aimed at tax deduction eligibility and long-term capital appreciation. Both instruments are used to achieve financial planning objectives; however, they have different priorities.
Being aware of these differences is also useful in ensuring that investments are in line with individual objectives. The analysis of returns, flexibility, and lock-in needs supports informed decision-making when developing a systematic approach to the portfolio.
Unit Linked Insurance Plan, or ULIP, is a combination of insurance cover and investment exposure. The premiums are split into life protection and market funds. Investors decide on the allocation of funds depending on the risky nature and the objective of financial planning.
The returns are based on market performance and fund selection. ULIPs have lock-ins and organised terms of policy. They are long-term financial plans and offer life cover, unlike pure investment products.Suitability is generally assessed based on cost, flexibility, and risk tolerance
Equity Linked Savings Schemes, or ELSS, are equity-orientated mutual fund investments that provide market-linked equity exposure and may offer tax deduction benefits. They promote capital growth on a long-term basis by diversifying stock portfolios using professional fund managers.
ELSS investments have a statutory lock-in of 3 years and carry market-related risk. They are based on the performance of equity and hence appropriate to investors who want to grow their investments but at the same time to be tax efficient. They are usually applied in diversified portfolios as a way of wealth creation.
Flexibility: ULIPs permit the ability to change allocation of funds in the policy structures, whereas ELSS only permits flexibility to make investments upon entry or redemption after completion of lock-ins, depending on investment plans.
Now that you've read all about ELSS and ULIPs, you can easily choose which one works better for you. Here is a table that can help you make a quick comparison of ELSS vs ULIP: which is better?
Features | ELSS | ULIP |
Tax-Saving Opportunities | According to section 80C of the Income Tax Act, long-term capital gains up to ₹1 lakh are exempted from taxes; however, gains of ₹1 lakh and above are taxed at 10%. | The premiums paid on the scheme are eligible for tax deductions of up to ₹1.5 lakhs as per section 80C of the IT Act. |
Costs and Fees Involved | Involves costs like entry load, asset under management expenses, exit load, and more. | Involves costs like administration charges, fund management charges, mortality expenses, and so on. |
Ease of Access to Funds | Funds can be accessed and withdrawn once the lock-in period of 3 years is over. | Funds can be accessed and withdrawn once the lock-in period of 5 years is over. |
Growth Potential and Returns | The growth potential is subject to market volatility and fluctuations and depends on investment in equities and related products. | The growth potential is subject to market volatility and fluctuations and depends on the value of a variety of underlying assets like bonds, MFs, equities, etc. |
Minimum Holding Period | Have a minimum holding period of 3 years. | Have a minimum holding period of 5 years. |
Both ULIPs and ELSS have their benefits and risks involved. You can earn significant returns from both products. The choice of which is better, ULIP vs. ELSS depends on your investment and financial goals, risk management strategies, etc.
Yes, the returns on ULIPs are taxable and are taxed as per the income tax slab of the investor. However, for the premiums paid on the scheme, you are eligible for tax deductions of up to ₹1.5 lakhs as per section 80C of the IT Act.
There are several differences that can help you make a comparison between ULIPs and ELSS in terms of tax-saving benefits, lock-in period, liquidity, potential returns, and fee structure.
Both ULIPs and ELSS offer tax-saving benefits. For instance, premiums paid on the scheme are eligible for tax deductions of up to ₹1.5 lakhs as per section 80C of the IT Act.
The lock-in period of ULIP is 5 years while for ELSS, it is 3 years. You can withdraw funds once the lock-in period is over.
Whenever you invest, make sure it aligns with your financial goals. ULIPs offer insurance and investment, while ELSS focuses on tax-saving and equity growth. ELSS has higher returns potential, but ULIPs provide life cover, so choose a plan that suits what you need.
ELSS has charges like entry load, asset under management expenses, exit load, and ULIP; on the other hand, it has fees like administration fee, fund management fee, mortality fee, and so on.
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Content Partner - Dalal Street Investment Journal Wealth Advisory Private Limited
This article is for educational purposes only and should not be considered investment advice. Market investments are subject to risks. DSIJ Wealth Advisory Private Limited is a SEBI-registered Research Analyst (Reg. No: INH000006396) and Investment Adviser (Reg. No: INA000001142). Please consult your financial adviser before investing.
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