ELSS or ULIP? Which would be the best option for the tax saving? Both of these products are designed for the tax saving. Both of these products invests in the equity market.
But, they have differences in many aspects. Both of these products are pushed by the different class of people. An insurance agent must be canvassing for the ULIP while a financial planner would advise for the Equity Linked Saving Schemes. A lot of confusion is there. Many things are told for ELSS and ULIP. In this post, I will try to put a clean and balanced picture of ELSS Vs ULIP.
Recommended: All About ELSS
The Comparison of ELSS Vs ULIP
I have compared the ELSS and ULIP on following 8parameters.
- Tax saving
- Ease of Operation
ELSS gives you tax benefit in 3 ways. The amount you invest in ELSS is eligible for tax deduction under section 80C. There is no tax on the annual growth of your income. Also, the maturity amount is exempted from tax.
Similarly, the ULIP also enjoy the all-round tax benefit. It enjoys 80C tax deduction and exemption on return and maturity amount.
The ELSS invests primarily into the shares. It can invest in any type of share. Thus it has the highest potential of return.
The ULIP also invests in equity. But an investor can also allocate some amount to debt fund. Because of this mix, the return from ULIP may be lower than ELSS.
The ELSS is a mutual fund hence it charges for the Fund management and distribution expense. This charge can go up to 3% of the invested amount. The mutual fund company deducts the expenses from your money every year.
The ULIP also takes fund management charge but it is lower than the ELSS. However, there are other charges in ULIP. Such as administration charges, mortality charges, premium allocation charges. These charges reduce your fund value substantially in the initial 5 years.
The ELSS is pure mutual fund investment. There is no insurance coverage.
The ULIP has inbuilt insurance cover. In fact, this inbuilt insurance cover makes it different from the mutual fund. However, the sum assured of insurance would not be high.
Every tax saving investment has a lock-in period. So the ELSS. But it has the shortest lock-in period. The money is locked only for 3 years.
The ULIP has a longer lock-in period. You can’t withdraw your money before 5 years.
The functioning of mutual funds is transparent. The NAV is updated daily and you can easily know about the portfolio. The comparison of ELSS is also easy.
On the other hand, ULIPs are not so transparent. The NAV is updated weekly. Also, data about the ULIPs are not easily available. Hence, the comparison is also not easy.
Ease of Operation
Buying ELSS through an online mutual fund distributor is very easy. After the first purchase, it becomes as easy as buying a share. You will get money within 3 working days of the redemption request.
ULIP form is detailed. It takes almost a week to complete the subscription process. Redemption also needs more formalities. Online ULIP plans are easier to subscribe.
The ELSS is risky as it invests in share market. And, you know, share can behave erratically. Whereas, you would not be able to do anything if the market goes down. As money would be locked for 3 years.
On the other hand, ULIP also invests in shares but, you can transfer your money from the shares to the bonds. Thus, you can avoid the constant market fall. However, knowing the future course of the market is too difficult.
|Tax Saving||All Round Tax Benefit||All Round Tax Benefit|
|Return||Potential To give Better return than NSC, PPF or tax saving FD||Potential to give the highest return|
|Charges||Various charges affects overall return||An ELSS can charge maximum 3% (2.5% in big cities)|
|Insurance||It is inbuilt||No insurance|
|Lock-In||5 years||3 years|
|Transparency||Less transparent. NAV is updated weekly.||Transparent. The net asset value (NAV) is updated daily.|
|Ease of Operation||The subscription Process in lengthy||ELSS purchase is easy just like buying a share.|
|Risk||Less risky as you can switch fund||Most risky|