ELSS vs ULIP’s – Which Tax Saving Option is better?

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The most popular and beneficial tax saving method adopted by individuals is to make use of the Deductions allowed under Section 80C. Section 80C allows for a deduction of up to Rs. 1.5 Lakh per person per annum provided the amount is invested in certain specified financial instruments.

There are various financial instruments approved for this purpose and the investments done in any of these instruments is allowed to be claimed as a deduction under Section 80C.

Some of the instruments provide a fixed assured return on investment while other provide variable returns. The most popular instruments which provide fixed returns are Fixed Deposits and PPF Account whereas the most popular instruments which yield variable returns are ELSS Mutual Funds and ULIP’s.

Apart from these a person can also claim deductions for Registration Charges paid on purchase of property and insurance premium paid for life insurance policy. However, in this article we would mainly be discussing about ELSS Mutual Funds and ULIP’s and which one of these 2 is better.

ELSS Mutual Funds

An ELSS Mutual Fund stands for Equity Linked Saving Scheme Mutual Funds and these funds are popular mainly because of the fact that the investments in these funds can be claimed as a deduction under Section 80C.

In other words, the investments made in other type of mutual funds cannot be claimed as a deduction under Section 80C and only the investment made in ELSS Tax Saving Mutual Funds can only be claimed as a deduction subject to a maximum of Rs. 1.5 Lakhs per annum.

These ELSS Tax Saving Mutual Funds have a mandatory lock-in of 3 years and an investor cannot premature the amount invested in these funds before 3 years. Moreover, the ELSS fund has to mandatorily invest 65% of its total assets in share markets.

ULIP’s

ULIP stands for Unit Linked Investment Plans and the amount invested in these funds can also be claimed as a deduction under Section 80C.

ULIP’s are investment cum insurance plans in the sense that they offer the dual advantage of giving you a return on capital invested and also offer an insurance cover to the investor. ULIP’s have a longer lock-in period of 5 years as compared to ELSS which has a lock-in period of only 3 years. This means that an investor cannot redeem his investment before 5 years from the date of investment.

ELSS Mutual Funds vs ULIP’s – Which one is better

Both ELSS Mutual Funds as well as ULIP’s invest the money in stock market and the returns generated from such investments are shared with the investors.

However, the fact that ULIP’s offer insurance along with investment returns makes it look a lucrative deal for investors and this is the reason why investors sometimes get tempted towards ULIP’s as compared to ELSS Mutual Funds.

However, the fact of the matter is that the returns generated by ELSS Mutual Funds are much better than the returns generated by ULIP’s. This is not a one-off case and has been observed in all cases that the returns generated by ELSS Mutual Funds are much better than ULIP’s.

Some investors believe that this is fine as ULIP’s also offer the advantage of insurance and therefore are willing to compromise the returns generated from the investment. This to some extent is true as investors are getting the insurance benefit as well but the returns generated from ULIP’s are too meagre for any investors to consider investing in them.

And therefore rather than investing in ULIP’s, if the same investor puts some money in ELSS and the balance in buying term insurance – he would not only get better returns on his investment but also get a higher cover insurance policy.

This can be explained with the help of the following examples:-

  • Case 1: Invest Rs. 100 in ULIP’s
  • Case 2: Invest Rs. 90 in ELSS Mutual Funds and balance Rs. 10 in Term Insurance

In the 2nd case, the returns generated would be much higher than in the 1st case and the insurance amount would also be higher. The amount invested in both the cases is the same i.e. Rs. 100 but in the 2nd case – the returns are expected to be higher. The tax exemption in both the cases would remain the same as Term insurance is also allowed to be claimed as a deduction.

The higher returns generated in case 2 have been seen and observed in almost all the cases in the past and this will continue in the future as well due to the inherent nature of ULIP’s.

ULIP’s end up paying a very high proportion of the amount collected as commission and therefore the amount left with them to invest is lower. ELSS Mutual Funds don’t pay such high commissions and therefore the amount left with them after paying commissions is much higher and therefore the returns generated by the investor is also higher.

PS: As the commissions paid by ULIP’s is very high, most bankers will try to sell you ULIP’s by showing you a rosy picture. They will try to show and prove that ULIP’s are better than ELSS but the fact of the matter is that ELSS + Term Insurance is always much better than ULIP’s.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and is an expert in helping people save Taxes legally. He can be reached by booking an appointment for Tax Advisory Service.