Introduction
While navigating the investment market, you will come across various avenues with distinct advantages. While good returns are the primary focus, saving on taxes also impacts your investment returns. If you agree and are looking for investment vehicles that provide the dual benefit of potentially good returns coupled with tax savings, ELSS and ULIP are apt options.
Equity-Linked Savings Schemes and Unit Linked Insurance Plans are long-term saving plans with tax exemptions under section 80C of the Income Tax Act. Which one among them makes for a better investment? ELSS or ULIP? Read on to learn.
ELLS vs ULIP: Comparison of value
Let's understand what ELSS and ULIP mean to uncover the value they bring as investments other than the tax benefit.
ELSS is a type of tax-saving equity-dominated Mutual Fund. It primarily invests in equity and equity-related assets. The stocks chosen are of various companies spread across industries and diverse sectors. The freeze-in period for this fund is three years. As the returns on ELSS are market-linked, they hold the potential of higher returns than other saving instruments like Fixed deposits and Provident Funds. However, they are equally exposed to higher risks.
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ULIP combines the concepts of insurance and investment. When you invest in ULIP, a portion of the premium is used to provide you with life insurance coverage. The rest goes towards investment in market-linked instruments. They include Equity Funds, Debt Funds, Money-market instruments, Bonds, securities, and a mix of other financial instruments. The lock-in period for investing in ULIP is five years.
Better Investment: ELSS or ULIP
Here are some factors comparing ELSS and ULP to help you decide which one is a better investment:
· Nature of investment
The primary focus of ELSS is providing you with a high-return potential investment avenue that also lets you save on tax. With ELSS, you can achieve your wealth creation goals.
In the case of ULIP, you not only get to earn returns on your surplus investment but can also enjoy the security that comes with life insurance. So, when life throws a curveball, you are prepared while saving for your future goals.
· Mandatory duration
As the lock-in period for ELSS is three years, it is ideal for meeting your medium to long-term goals. Staying invested for a minimum of three years is also practical for weathering the impact of the fluctuating market.
ULIP allows you to earn returns for a long term with a lock-in period of five years. Meanwhile, you also get to seek protection under the life insurance program for a substantial. If you wish to continue, you can easily renew the scheme.
· Charges
With ELSS, you primarily incur the cost-of-expense ratio. Some other case-based charges include transaction cost and exit load. They are usually minimal in comparison to ULIP.
ULIPs involve a range of costs, including premium allocation charges, fund management costs, policy administration fees, mortality charges, surrender charges, etc.
· Flexibility
About 80%, of ELSS funds get invested in equity. The rest goes towards fixed-income securities or money market instruments. Hence, the exposure is concentrated on fewer underlying assets.
With ULIPs, you can choose between a variety of fund options after evaluating your risk and return requirements. You can combine equity and debt instruments. This gives you relatively higher flexibility in choosing your underlying assets.
· Taxation norms
As discussed, both, ELSS and ULIP are exempted from tax under the section 80C of the Income Tax Act. However, the tax treatment for these investments slightly differs. You can apply for a tax deduction of up to Rs. 1.5 lakh on the invested amount. The returns are also exempted. However, long-term gains over and above Rs. 1.5 lakh get taxed at 10%.
Similarly, up to Rs. 1.5 lakh contributed to ULIP is eligible for deduction in ULIP. Plus, the returns on maturity are also tax-free as per Section 10(10D). However, if the premium amount exceeds Rs. 2.5 lakh, the amount receivable becomes taxable. For gains exceeding Rs. 1 lakh, a 10% tax is applicable as long-term capital gains tax.
· Risk
As ELSS mostly deals with equity and equity-linked securities, the risk is high due to increased market fluctuation. At the same time, such fluctuations increase the potential for higher returns.
The level of risk with ULIPs depends on the type of fund chosen. The range of funds distribute the risk value, especially with the inclusion of Debt Funds. Hence, ULIPs are comparatively less risky.
Which one to choose? ELSS or ULIP for long-term growth
Now that you have understood how ELSS and ULIP work and analysed the ELSS vs ULIP returns, taxability, risk, and other factors, you are well-equipped to make an informed choice. The key is to understand how each of these instruments complements your investment objective, risk tolerance, and expectations.
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