Simplifying Life Insurance in India
Difference Between ULIP and ELSS & Which one is Better?
ULIPs (Unity-Linked Insurance Plans) and ELSS (Equity-Linked Savings Schemes) are both lucrative investment choices. However, the one which is more suitable for you would depend on your financial goals.
They are similar in the sense that both help in tax saving and investment in equities. However, the main difference is in the fact that one provides life insurance along with investment and the other one is a pure investment.
What is an ULIP?
What is ELSS?
What are the Differences Between ULIP and ELSS?
To decide whether ULIP or ELSS is a better investment choice for you, it is vital to know the differences between the two. Therefore, in the following table, we will draw a comparison between them.
|
Basis of Comparison |
ULIP (Unity-Linked Insurance Plan) |
ELSS (Equity-Linked Savings Scheme) |
|
Investment Type |
ULIPs are a combination of insurance and investments. |
ELSS is purely an investment scheme. Therefore, they are a type of mutual fund scheme. |
|
Objectives |
They offer life coverage alone with investment returns and tax benefits. |
On the other hand, ELSS are professionally managed mutual funds which offer the advantage of a diversified investment portfolio. |
|
Returns |
Returns associated with ULIP are variable since the investor can choose a combination of equity, debt or hybrid funds to invest. |
Since ELSS are market-linked, the returns are dependent on the market performance. The approximate returns range from 12 - 14%. |
|
Liquidity |
ULIPs have low liquidity. |
On the other hand, ELSS is high in liquidity. Meaning, they are easier to convert into cash than ULIPs. |
|
Regulatory Bodies |
ULIPs are regulated by the IRDA (Insurance Regulatory and Development Authority of India). |
ELSS is regulated by SEBI (Securities and Exchange Board of India). |
|
Lock-in Period |
They have a lock-in period of 5 years. The investor may stop the premium payments, but the policy cannot be surrendered before the end of the lock-in period. |
They have a lock-in period of 3 years. |
|
Flexibility |
In ULIPs, switching between different types of investments, such as equity, debt, balanced, hybrid funds, etc., is allowed. The number of switches per year and the costs associated depends upon the company. |
In ELSS, the whole amount is invested in equity and equity-linked funds. Hence, switching is not allowed. The investor may do a transfer after the lock-in period is passed. |
|
Risk Associated |
ULIPs are high-risk investments. The returns are entirely dependent on the fund’s performance in the market. However, they offer live coverage. |
ELSS funds are also high-risk investments where the returns depend upon the fund's market performance. |
|
Transparency |
They do not offer full transparency since it is difficult to determine where the money is being invested. |
On the other hand, ELSS is very transparent. As a result, the investors receive complete insights into where their money is being invested. |
|
Tax Implications |
Under Section 80C of the Income Tax Act 1961, ULIPs are offered tax deductions on the premium paid. However, the gains are taxable as per the prevailing income tax laws. |
ELSS investments are taxable as per Section 80C of the Income Tax Act 1961. A LTCG (Long-Term Capital Gains) tax of 10% is applicable to returns above ₹ 1 lakh. |
|
Additional Charges |
Multiple charges are applicable, such as premium allocation charges, mortality charges, policy administration charges, etc. They are capped at 2.25% for policies with tenures of 10 years or more and 3% for others. |
Exit load and fund management charges are applicable. These depend upon the fund but are usually around 2%. Direct plans often have lower charges. |
|
Loyalty Additions |
Loyalty additions are offered if you remain invested throughout the policy's tenure. The benefits are given as per the terms and conditions of the plan. |
On the other hand, loyalty additions are not applicable for ELSS. |
ULIP vs ELSS: Examples of Taxation
While comparing ULIP vs. ELSS, it is essential to know the differences between them based on tax implications.
- Both the types of investments are tax-saving plans which offer tax benefits up to ₹5 lakhs under Section 80C of the Income Tax Act 1961.
- When it comes to ULIPs, the maturity amount is exempt from taxation. However, taxes will be applicable if you decide to surrender before the lock-in period of 5 years. The gains are exempt under Section 80C.
- Tax exemption of up to ₹5 Lakhs is applicable to ULIPs where the annual premium is less than or equal to 10 times the insured amount. However, for policies purchased after 1st April 2021, the annual premium must be less than five times the insured amount.
- On the other hand, ELSS investments are taxable as per Section 80C of the Income Tax Act 1961. In addition, a LTCG (Long-Term Capital Gains) tax of 10% is applicable to returns above ₹5 Lakhs.
From the ULIP vs. ELSS comparison drawn above, you can notice that ELSS is a better investment instrument in terms of tax benefits and provides more market exposure. On the other hand, ULIP is a good option, primarily for life insurance. It offers some investment benefits in addition.
Frequently Asked Questions
Are dividends from ELSS subject to taxation?
Are ULIPs a type of mutual fund?
When is it a good time to invest in ULIPs?
What are the disadvantages of ULIP?
Some of the disadvantages to consider before you opt for a ULIP include:
- Higher premium charges
- Your returns are subjected to market risks
- The product and plan structure is much more complex than traditional insurance plans
- There is low transparency of the portfolio holdings which may make it more difficult to understand the investment strategy of the company.
Which is more flexible, ELSS or ULIP?
Important Guides related to Life Insurance
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
