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ELSS and ULIPs are often pitted against each other, and during the tax-saving season, the debate keeps resurfacing. Both products offer tax benefits under Section 80C of the Income Tax Act 1961 and are considered investment products. So, investors may find it confusing as to which one is better, and it is natural to compare the two. So, let's deep dive into a deeper analysis of ELSS vs ULIP.

ELSS vs ULIP - Table of Contents

What is ULIP?

ULIP is a type of insurance product with an investment aspect. The premium paid for ULIP policies is invested in multiple fund options like debt, equity or both. ULIPs also have life insurance coverage, and death benefits paid are higher than the sum assured. Additionally, ULIPs have a lock-in period of 5 years in which the money invested cannot be withdrawn before the completion of the period. 

What is ELSS?

ELSS is a type of mutual fund that deals primarily in equity shares of companies that are listed on the stock exchange. The returns on these funds are market-linked and tend to be higher than those of FDs and other investments. 

But these returns are subject to market fluctuations, and ELSS does involve a risk of losing money. Additionally, ELSS has to be locked in for a period of 3 years. This means the invested capital cannot be withdrawn before three years are completed. 

ULIP vs ELSS - Main Differences

1. Product Features & Types: 

One of the fundamental differences between ULIP vs ELSS is that ELSS is sold as a mutual fund, whereas ULIPs are a combination of insurance and investments. Another aspect to realize is that insurance companies offer ULIPs. When the investor dies, their nominee will receive the higher sum insured, in the case of ULIP, whereas in ELSS, they will receive the total value of the funds during its time of redemption. 

2. Objectives of Investment: 

ELSS aims at corpus building like most equity funds but has a lock-in period of 3 years. Most experts will suggest that holding it for 5-7 years provides better benefits. ULIPs aim to provide life coverage to the insurer so that they can get some capital appreciation. 

3. Risks Involved: 

ELSS is a high-risk product as it is a mutual fund segregating 65-80% of funds to equities. ULIPs are less risky than ELSS as the policy coverage is guaranteed even when the returns are not. Also, ULIP has equity, debt or a hybrid fund unit that decides the risk factor involved. When it comes to ULIPs, they are generally low-risk. So, investors can easily switch from equity to debt funds during the mid-lifecycle of the investment. 

4. Returns Offered: 

ELSS uses all investors' money to buy funds, whereas ULIPs do not. So, it is natural that ELSS has a higher chance of delivering better returns. Also, if ULIP invests in debt securities, the returns are lower than that of equity funds but are more stable. ELSS is also known to generate higher returns than ULIPs. 

5. Taxation: 

Both ULIP vs ELSS are exempt from tax up to Rs. 1.5 lakhs in a given financial year under Section 80C. But once the units of ELSS and ULIP are redeemed post lock-in periods of 3 and 5 years, they are subjected to tax. ELSS is taxed like equity funds, whereas ULIPs are taxed per the new government policy under 8AD from 1st February 2021. Earlier ULIPs were tax-free under Section 10(10D), but now they have tax exemptions up to Rs. 2.5 lakhs. 

6. Liquidity: 

ELSS has more liquidity than ULIPs as it has a smaller lock-in period. ELSS is the preferred choice of investors as ELSS has the shortest lock-in time among all tax-savings tools under Section 80C. The lock-in period of ULIP is 5 years. But there is no option to withdraw either ULIP vs ELSS prematurely. 

7. Switching up Options: 

One key parameter that separates the two products is that switching between options in assets is available on ULIP. ELSS is an equity fund, so investors cannot opt for an alternate asset allocation. On the other hand, ULIP is an insurance product that invests in funds where the investors can choose the funds. 

8. Expense Ratio: 

Another critical aspect of these investments is the expense ratio, which is percentage-based. There are specific charges that fund houses levy for managing the funds. A higher expense ratio means paying for a higher percentage of the returns as a fee for professional management of the funds. In the end, this impacts the returns that come to the investors. ELSS, on the other hand, has a lower expense ratio and ranges from 1.35-2.5, whereas ULIP starts from 2.25. 

ULIP vs ELSS - Comparative Analysis

FactorsUnit-Linked Insurance Plan (ULIP)Equity-Linked Savings Scheme (ELSS)
Product FeaturesULIPs are a combination of insurance and investments.ELSS are a mutual fund.
Objectives of InvestmentULIPs aim to provide life coverage to the insurer so that they can get some capital appreciation.ELSS aims at corpus building like most equity funds. 
Risks InvolvedULIPs are less risky than ELSSELSS is a high-risk product.
ReturnsAs ULIP invests in debt securities, the returns are on the lower side.ELSS uses all the money paid by investors to buy funds so returns are higher. 
Tax BenefitsTax deducted under Section 80C.ELSS is taxed at 10% on and above Rs. 1 lakh.
LiquidityULIPs have a lock-in period of 5-7 years. ELSS has the shortest lock-in time - 3 years
Switching up OptionsSwitching between options in assets is available on ULIPELSS is an equity fund so investors cannot opt for an alternate asset allocation.
Expense RatioULIP has a higher expense ratio that starts from 2.25ELSS has a lower expense ratio and ranges from 1.35-2.5.



Regarding ULIP vs ELSS, both are tax-saving options under Section 80C but are entirely different nature-wise. They are regulated by different regulatory bodies of the Insurance Regulatory and Development Authority (IRDA) and the Securities and Exchange Board of India (SEBI). IRDA regulates ULIP and is an insurance product with mutual fund benefits. On the other hand, SEBI regulates ELSS as a mutual fund in totality. 

So, when planning your investment portfolio, remember to discuss the different lock-in terms, risk-return portfolios and taxation rules. 

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Founder & Managing Director of Investor Diary

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