We are in the last 3-4 months of the financial year. Tax-saving season is here, and you are facing that familiar dilemma: where should you invest to save taxes and grow your wealth? The options under Section 80C are plenty, but two often catch investors’ eyes—Unit Linked Insurance Plans (ULIPs) and Equity-Linked Saving Schemes (ELSS). Both seem promising, but which one truly fits your financial goals? The answer isn’t just about numbers; it is about aligning your investments with your future dreams and current realities.
What Are ULIPs and ELSS
Unit Linked Insurance Plans or ULIPs combine life insurance with market-linked investments. When you pay the premium, a portion goes toward life insurance, while the rest is invested in funds of your choice, be it equity, debt, or hybrid.
Modern ULIPs have evolved, with lower charges and better transparency. Thus, ULIPs, with a 5-year lock-in, can be used to achieve various long-term financial goals. These could be retirement planning, a child’s education or wealth creation etc.
ELSS, on the other hand, focusses solely on equity investments as a mutual fund. With a 3-year lock-in, it’s like planting a sapling and waiting for it to grow. High returns are possible, but so are the risks. For those aiming for substantial growth, ELSS could be the vehicle provided they can stomach the market’s ups and downs.
ULIP vs ELSS – Head to head comparison
1. Rewards and risks
ULIPs offer a dual benefit: insurance and investment. They allow multiple switches between equity, debt, and hybrid funds tax-free. This feature can be a lifesaver during market volatility. For example, if the market dips, you can move funds to a safer debt option without incurring tax or extra costs. Conversely, when markets are buoyant, you can again switch your hard-earned money from debt avenue to equity funds.
ELSS, however, is strictly equity-based. If you want to switch funds, you will need to redeem units, potentially triggering capital gains tax. So, while SIPs in ELSS are flexible in terms of investment amounts, fund-switching isn’t an option without tax consequences.
Pro-tip: ULIPs score higher in flexibility. This may be especially true for risk-averse investors who need to balance insurance and investment.
2. Costs and charges
ULIPs come with various charges, such as premium allocation, mortality, and fund management fees. However, these costs are regulated by the Insurance Regulatory and Development Authority of India (IRDAI). They are capped at 3% for the first 10 years and 2.25% thereafter, ensuring they remain transparent and manageable. This structured cap helps prevent unexpected expenses and protects your long-term returns.
ELSS mutual funds typically have expense ratios up to 2.5%. While this might seem lower than ULIPs at first glance, compounded costs over time can erode returns. Moreover, expense ratios in ELSS vary depending on the fund house and can increase unpredictably, impacting long-term planning.
Pro-tip: Many believe ELSS is always cheaper, but when you factor in transaction fees, exit loads, and tax on gains, the cost difference might be less significant than it appears.
3. Returns expectations
Risk tolerance is key. Are you an investor who is okay with taking higher risk for potentially higher rewards or a safety-first investor? Both ULIPs and ELSS are market-linked, as they invest in a mix of debt and equity instruments.
Historically, equity fund ULIPs have given decent market returns. ULIP funds invested in debt and hybrid assets have efficiently mirrored the underlying asset returns. For a couple in their early 30s planning for their child’s future while seeking insurance protection, ULIPs can provide peace of mind versus the anxiety they might face with ELSS during market downturns.
Similarly, SIPs in ELSS have shown higher returns, but this also depends on the timing of your exit from this investment. If you exit when the markets are up, you may benefit from higher returns, and if you exit when markets are low, your returns might suffer.
Pro-tip: If you’re comfortable with market fluctuations and seek higher potential returns, ELSS might be a good fit. However, if you prefer a more stable investment with insurance coverage, a ULIP could be a better option.
4. Tax benefits
Both ULIPs and ELSS qualify for Section 80C deductions (up to ₹1.5 lakh). But here’s where ULIPs edge ahead: maturity proceeds are tax-free under Section 10(10D) if the annual premium is below ₹2.5 lakh. These benefits mean that you not only save tax during the investment phase but also enjoy a tax-free ULIP corpus at maturity.
ELSS gains, on the other hand, are subject to a 12.5% long-term capital gains (LTCG) tax if they exceed ₹1.25 lakh in a financial year. So, the potentially higher gains helping your ELSS corpus grow are also taxed more during maturity. This means, the post-tax corpus in case of ELSS, could be lower than ULIPs assuming both deliver similar investment returns.
Pro-tip: To maximise your tax savings, consider combining ULIPs and ELSS in your portfolio. While ULIPs offer tax benefits on both premiums and maturity proceeds, ELSS can be used to supplement your tax savings and potentially higher returns.
Making an informed choice
So, ULIP or ELSS? While both offer tax-saving benefits under Section 80C, the best choice depends on your goals, risk tolerance, and family responsibilities. ULIPs stand out by offering a unique blend of investment growth and life insurance protection, ensuring your loved ones are financially secure no matter what. The flexibility to switch between funds without tax implications gives ULIPs an edge in a volatile market.
ELSS may offer higher returns, but they come with greater risk and no safety net. Thus, when it comes to choosing between ULIP and ELSS, it would be advisable to weigh your requirements, risk tolerance, and availability of a safety net. Both can help you grow your wealth steadily, while a ULIP can act as a dependable partner, guiding you through life’s uncertainties. Every rupee invested today safeguards tomorrow’s dreams.
