Equity Linked Savings Schemes (ELSS) and Unit Linked Insurance Plans (ULIPs) are two of the most popular investment avenues in India. While they both offer tax* benefits, they are designed to cater to the different needs of investors. While ELSS schemes are designed to help investors generate wealth over the long-term, they offer tax* deductions too.

 

A ULIP also offers tax* benefits while offering wealth creation opportunities and life insurance. As an investor, it is important to choose investment avenues carefully based on your goals and requirements. In this article, we will discuss ULIPs and ELSS schemes and look at the ULIP and ELSS funds.

 

What are ULIPs and ELSS Schemes?

 

An Equity Linked Savings Scheme (ELSS) is a mutual fund instrument that invests money in equity and equity-linked instruments to offer market-linked returns to investors. These schemes are designed to offer tax* deductions under Section 80C of the Income Tax* Act 1961.

 

On the other hand, ULIP insurance is a life insurance policy that also offers wealth generation opportunities by investing a part of the ULIP premium into different funds.

 

ULIP & ELSS Funds

 

If you are looking for investment options that offer tax* benefits too, the ULIPs and ELSS funds are two names that you cannot miss. However, before you choose, make sure that you understand the features and benefits offered by each of them to make an informed decision. Here is an ELSS & ULIP data for quick reference:

 

• Objective of the fund
  
  ELSS schemes are professionally-managed mutual fund schemes that offer investors an opportunity to invest in a diversified equity fund that also offers tax* benefits. On the other hand, a ULIP plan is a life insurance policy that also invests in mutual funds and offers tax* benefits.
  
  
• Returns
  
  Talking about ULIP & ELSS returns, it is important to remember that both ELSS and ULIPs are market-linked investments. This means that the returns offered by them depend on the performance of the market. However, with ELSS schemes, the returns depend on the securities held by the fund manager under the scheme. However, when you buy a ULIP, you can choose a combination of equity, debt, and hybrid funds. Hence, the returns can vary.
  
  
• Lock-in period
  
  The lock-in period of an ELSS scheme is three years, while that of a ULIP plan is five years.
  
  
• Tax* computation
  
  Both ELSS and ULIPs offer tax* exemption under Section 80C of the Income Tax* Act 1961. Long-term capital gains (LTCG) in ELSS schemes are taxed at 10% above ₹1 Lakh.
  
  
• Liquidity
  
  Being equity-oriented funds, ELSS schemes have apt liquidity in the markets. In opposition, ULIPs have lower liquidity.
  
  
• Charges
  
  The charges associated with ELSS schemes primarily include fund management and mutual fund-related charges. As opposed, ULIPs have premium allocation charges, policy administration charges, and various other costs associated with providing life insurance and investing funds in various mutual funds.
  
  
• Regulating authority
  
  ELSS schemes are regulated by the Securities and Exchange Board of India (SEBI), and ULIP plans are regulated by the Insurance Regulatory and Development Authority of India (IRDAI).
  
  
• Risks involved
  
  ELSS funds are risk investments since the fund primarily invests in equity and equity-related instruments. However, when you invest in a ULIP plan, you can choose between equity and debt based on your risk tolerance levels. Additionally, ULIPs offer life insurance coverage.
   

Things To Remember Before Choosing Before ULIPs And ELSS Schemes

 

 

Here are some things that you need to know before choosing between ULIP vs ELSS:
 

• When you buy a ULIP^, the initial premium amount is spent on meeting policy expenses
• Subsequently, the premium is divided into two parts – providing life insurance cover and investing in mutual funds
• You can invest in mutual funds using a systematic investment plan (SIP)
• There is no limit to the amount you can invest in an ELSS scheme
• While the lock-in period for an ELSS scheme is three years, you can continue staying invested even after the end of the lock-in period
• While the risks are more, ELSS schemes also offer a chance of earning more returns
   

Tax Treatment – ULIP and ELSS
 

ULIPs and ELSS schemes offer a tax* deduction of up to ₹1.5 Lakh under Section 80C of the Income Tax* Act 1961. When you purchase a ULIP plan, the maturity amount is tax*-free too. However, if you surrender before the mandatory lock-in of five years, tax* is levied and any deduction claimed is withdrawn. Benefits are also offered under Section 10(10D).  On the other hand, ELSS schemes cannot be redeemed within the mandatory lock-in period of three years.
 

Conclusion

 

If you have decided to purchase a ULIP plan, then make sure that you look for a reliable insurance company that offers feature-rich ULIPs like Tata AIA Life Insurance Company. Also, make sure that you observe different providers and plans before buying one.
 

L&C/Advt/2022/Oct/2450