One often gets confused between ELSS and ULIP while investing in the equity markets through these instruments. Therefore, it is important to understand the similarities and differences for making an informed choice.
A majority of investors often get confused between ELSS and ULIP while investing in the equity markets through these instruments. Both of these investment avenues are eligible for deduction under Section 80C of the Income-Tax Act. However, the objectives of these two schemes are different. Hence it is important for an average investor to understand the similarities and the differences between the two for making an informed choice.
Equity Linked Savings Scheme (ELSS)
ELSS is a diversified equity mutual fund that invests primarily in equity with other capital market instruments. In a financial year, an investor can get a maximum tax benefit up to Rs 150,000 as a deduction under section 80C against investments made in ELSS. ELSS has a mandatory lock-in period of three years. After announcement of LTCG tax in the Union Budget 2018, effective from April 1, 2018, redemption, profits above Rs 100,000 from ELSS funds will be subject to 10% tax. Some of the basic features of an ELLS scheme are:
# You are free to invest any amount in ELSS, but for tax deductions, contributions of only up to Rs 1,50,000 will be considered under Sec 80C of the Income Tax Act.
# ELSS is considered as one of the best investment options for investors as it offers tax benefits with potentially higher returns due to investment in equities and shortest lock-in periods within all tax saving products.
# The returns on ELSS schemes on redemption are applicable to LTCG tax at 10% above Rs 100,000.
# You can continue to invest in this scheme even after the completion of the lock-in period of 3 years.
# The risk involved with ELSS is higher when compared to other safe investment avenues such as Fixed Deposit or a PPF due to its exposure to the equity markets. However, the returns are potentially higher as well.
Unit Linked Insurance Plan (ULIP)
ULIP is an investment mixed insurance product where one part of the premium is used as an investment in different funds, while the other part of the premium paid is kept to cover the life of the investor. Investors can choose to invest in equity, debt, hybrid, or money market funds through ULIPs. Of the amount invested in ULIPs, a contribution of up to Rs.150,000 can be claimed as tax deduction under Section 80C of the Income Tax Act. These investments have a lock-in of five years. An investor can choose to switch from equity to debt or hybrid as per his investment objective during the lifecycle of the investment. Some of the basic features you must know about ULIP are:
# A unique feature that sets ULIPs apart from traditional investment policies is that it offers both protection and the power of investment.
# During the initial years, the premium of the ULIP payment goes towards meeting one’s insurance needs and policy expenses. Post these deductions, the premium is divided between providing you a life cover and buying fund units for investment.
# A variety of expenses involved in ULIP investment includes premium allocation charges, administration charges, mortality charges, and fund management charges.
Which is better: ELSS Vs ULIP?
Following is a brief comparison of the different features of both the products that will help you take an informed decision:
|Orientation||Pure Investment instrument||Insurance-cum-Investment Instrument|
|Objective||A professionally-managed fund that gives benefits from diversified equity investments with tax benefit.||A product that gives leverage to enjoy investment benefits with life coverage along with tax relief.|
|Purpose||High returns from diversified equity investments||Returns on long-term investment and life cover of the investor|
|Lock-in period||Three years||Five years, irrespective of premium payment continuation surrender is not possible prior to lock-in|
|Taxation||Investment is exempted u/s 80C. Returns will be taxed @10% above Rs.100,000 under the new long-term capital gains tax act.||Investment is exempted u/s 80C. The policy must be in force during the complete lock-in period. If not, all deductions claimed will be reversed and tax will be applicable. Tax on Returns is applicable when the annual premium is more than 10% of the sum assured.|
|Cost Associated||Predictable cost as exit load and fund management charges are applicable as mentioned in fund application documents.||There are complex and multiple charges like policy administration charges, premium allocation charges, mortality charges, etc.|
|Switching Funds||Not allowed, but SIP route can be followed after the lock-in||Allowed with the capping of number of switching and is chargeable|
|Transparency||Transparent and complete details on funds, including the quantum of stocks held by funds are available||Lacks transparency as you are unaware where the funds are invested|
|Risk||High risk, high returns but not guaranteed||High risk, returns not guaranteed, but life cover is confirmed|
Some features that makes ELSS more favorable as an investment vehicle is its transparency in terms of predictable cost and easily understandable returns. An investor is provided with complete information on what is the objective of the fund, its investment pattern and other relevant details. On the other hand, investments in ULIPS are not so transparent. There is always a haze around the charges and fees as they are charged under various head such as premium paid, charges towards mortality, fund management fees etc. ULIPs have high first year charges towards acquisition (that includes agent commissions). In a ULIP, the mix of investment and insurance prevents savers from having a clear cost-vs-benefit understanding of either of the two components. In a ULIP, your money is locked for a longer period of time. Therefore, it can be concluded that investments in ULIPs come at a cost of transparency and liquidity. Theoretically the lock-in period is five years, but since terminating the policy early affects returns adversely, therefore to maximize returns from an ULIP policy, one has to stay invested for 10 to 15 years. High costs, difficulty in evaluation, lack of transparency and low liquidity reduce the attractiveness of ULIP as an investment vehicle.
If your goal is pure investment with benefit of tax saving and capital appreciation, then ELSS is a better option for you. For those who are looking for a relatively shorter-term investment with growth potential through pure equity investment, ELSS is a good bet as returns expected from equity markets is comparatively higher than those from other investment classes. It should, however, be kept in mind that equity investments should always be made with a long-term perspective to reap the maximum benefit of wealth creation. The following table provides a list of some of the popular ELSS funds, as it is evident that some better-managed ELFF funds have provided returns ranging from 15 to 18 per cent on a three-year investment horizon which is a very good rate of return.
(Rs.Cr on Mar’ 18)
ELSS – Returns (in %) – as on Jun 15, 2018
|Tata India Tax Savings Fund – Direct (G)|
|ABSL Tax Relief ’96-Direct (G)|
|L&T Tax Advantage -Direct (G)|
|Invesco India Tax Plan – DP (G)|
|Tata India Tax Savings Fund – Reg (G)|
However, if your financial objective is to cover your life with tax-saving benefit, then ULIP is the way to go. ULIP works better for longer-term investment horizons and for goal-based investments such as child education, marriage etc. The added advantage of a live insurance coverage gives this investment option a unique edge. The following table provides a list of some of the popular schemes available in the market. Some of the characteristics that separate different ULIP funds are entry age, premium allocation charges and administration charges which should be important considerations before making any investment choice.
Entry Age (Years)
Minimum Premium (Rs.)
Premium Allocation Charges (%)
Policy Admin Charges
No of Free Switches in a Year.
|Aegon Life iMaximise Secure Plan|
7 to 55
24,000 to 36,000
Rs.100 Per Month
|Bajaj Allianz Future Gain|
1 to 60
0% to 1.5%
Rs.33.33 Per Month
|PNB MetLife Smart Platinum|
7 to 70
30,000 to 60,000
1.25% per annum (Max)
|MAX Life Fast Track Growth Fund|
10 to 50
25,000 to 100,000
2% (Single Premium) to 4% (Annual Premium)
Rs.1500 per year
|SBI Life Wealth Assure|
8 to 65
3% for single premium
Rs.45 per month
To summarize, the choice between ULIP and ELLS is personal and should be based on one’s own investment objective, time horizon and risk appetite. The basic rule of saving is not to mix up insurance and investments, and therefore it should be remembered that ELSSs and ULIPs are two different products that serve different purposes.
(By Rahul Agarwal, Director, Wealth Discovery/EZ Wealth)