Difference Between ELSS and ULIP

What is Equity Linked Savings Scheme ?

Equity Linked Savings Scheme (ELSS) is a mutual fund scheme that invests in equity markets while saving taxes. ELSS is considered to be diversified in nature as it invests in different sectors and picks stocks of companies with varied market capitalizations.  Returns earned are directly related to the performance in the markets. ELSS is advised to investors who are looking for a long-term investment. 

Features of Equity Linked Savings Scheme

Long-Term Investment

ELSS has a lock-in period of three years which means an investor is mandated to remain invested in the scheme for at least three years without exiting. After three years, it is up to investors to either exit and stay invested in the scheme.

Tax Benefits

When it comes to ELSS, one can avail tax deductions of up to Rs. 1.5 Lakhs on investments in ELSS annually under section 80C of Income Tax Act,1961. However, there is no upper limit set upon the amount of investment one can make. For holdings longer than 1 year, the returns that surpass Rs. 1 lakh are charged with a 10% Long Term Capital Gains (LTCG) Tax.

Risk

ELSS funds usually involve moderate to high levels of risks due to investments in equity markets. Investments in equity markets make the NAV of the mutual fund scheme exposed to the risk of instability or volatility. Therefore, ELSS is recommended to the investors having a high-risk tolerance.

Also Read: Best ELSS Mutual funds to Invest in India

What is Unit Linked Insurance Plan ?

Unit Linked Insurance Plan is a kind of life insurance plan which is considered multifaceted as it offers an opportunity to invest while providing an insurance cover. ULIP was initially launched by Unit Trust of India (UTI) in 1971. While investing in ULIP, the insurance company invests a portion of the amount of premium into different types of investment instruments like equities, bonds, money market instruments, etc. The balance of the premium is used in offering the insurance coverage.

Features of ULIPs

There are many features of ULIPs which are mentioned below:

Flexibility

ULIPs provide flexibility to the policyholders in terms of having a choice to switch between different funds according to varying requirements. There are various kinds of funds like equity funds, debt funds, cash funds, etc. 

Liquidity

ULIPs offer very limited and low liquidity. There is also a minimum lock-in period of 5 years in ULIP plans during which redemption is allowed but money is paid back after the lock-in period. And also there are conditions on the withdrawals after the lock-in period.

Tax benefits

Premiums paid for ULIP plans are eligible for claiming tax deductions of up to Rs.1.5 lacs under Section 80C of the Income Tax Act, 1961 on the condition that the annual premium paid is less than 10% of the assured amount. And the maturity proceeds of ULIPs are free from tax under certain conditions.

Risks Involved

There are a variety of funds to choose from in the ULIPs and hence risk levels also vary. ULIPs can be considered by investors with any level of risk tolerance. 

Death Benefits and Maturity Benefits

ULIPs provide death benefits to the nominee in case of the demise of the policyholder as per the selected plan.

Maturity benefits(assured amount or fund value) are provided by ULIPs to the policyholder at the maturity of the scheme as per the selected plan.

Now, let's have a look at how different they are from each other.

Aslo Read : Best mutual fund advisor in India

ELSS and ULIP Comparison in Detail

Objective

Equity Linked Savings Scheme (ELSS) is a mutual funds scheme that invests in equity markets while providing the tax-saving benefits to the investors. Whereas, Unit Linked Insurance Plan (ULIP) is a kind of life insurance plan that is considered multifaceted as it offers an opportunity to earn returns along with providing an insurance cover.

Tax Benefits

Both the instruments are highly popular tax-saving investment options available in the market.

In ELSS, investors can avail tax deductions of up to Rs. 1.5 Lakhs in a financial year under section 80C of Income Tax Act,1961. There is no upper limit on the investments that can be made in a financial year. If the ELSS units are held for more than 1 year, returns that surpass Rs. 1 lakh are charged with 10% Long Term Capital Gains Tax (LTCG). When it comes to ULIP, premium which is paid for ULIPs is considered to be eligible for tax deduction under Section 80C under Income Tax Act, 1961. The maturity benefits of ULIPs are exempted from taxes under section 10(10D) of the IT Act,1961 subject to certain provisions.

Premature Withdrawal

ELSS schemes do not allow premature withdrawals before the lock-in period of 3 years. ULIP plans allow premature withdrawals or redemption from the scheme but still, money is paid only after the completion of 5 years. And that too becomes costly as a significant amount is charged for the redemptions including the charges for discontinuation, mortality, and others. This way, one is well off by not applying for may withdrawal before the lock-in period.

Returns

In ELSS, the investors can expect returns of around 12-15% on their investments if they stay invested for a long period. The returns are linked to the markets and thus, will vary across different time periods as per the market conditions.

In Ulip plans, the returns on investment varies across the fund types. Investors who have chosen the debt fund option can expect approx. 4-6% of returns and choosing the equity fund option, one can expect 8-10% returns.

The effective returns of ULIP might come out to be even lower due to its cost structure. Let's have a look at the cost structure of both the plans.

Costs

ELSS schemes have predictable cost and only charge the fixed expense ratio on the assets managed. The costs vary across mutual fund schemes from different fund houses.

ULIPs have a complex cost structure including charges in the name of management fees, mortality charges, administration expenses, and other charges along with the premiums. Also in the initial years, ULIP plans levy exorbitant charges on the premiums. The costs in  ULIPs cover a significant portion of the total premium that the actual investment portion is reduced which then is not able to generate efficient returns.

Transparency

ELSS schemes have a high transparency about their operation of the scheme, it's holdings, costs, and other things. It is very easy for the investors to gather information about the ELSS scheme they have invested in.

On the other hand, ULIPs carry low transparency and so, it becomes difficult to find information & accurate details about these plans.

Coverage

The ELSS schemes do not provide any coverage for the nominees as it is a pure investment product.

ULIP plans offer life cover to the policyholder and ensure the coverage to the nominee in case of the policyholder's death. However, these plans do not offer sufficient coverage for the given premium amounts. The policyholder needs to pay a hefty sum for getting the desired life cover which is available at very low costs in the market while buying a separate term insurance policy.

Which is Better, ELSS or ULIP?

In Conclusion, considering all the features & differences in both the plans it would not be unfair to prefer ELSS over the ULIP plans because of their high transparency, lower lock-in, lower costs, and the higher expected returns on investment.

Though the ULIP plans fulfill both the investment & insurance needs of the investors, they are not able to provide efficiency to the investors in both the aspects. The investors would be better off by investing in ELSS schemes for their tax-saving purposes (or equity MFs if not for taxes). For meeting the insurance needs, buying a separate term policy for a suitable cover as per the investors need would be the best deal.

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