ELSS vs ULIP: A Comparison between Two Tax Saving Scheme..!!
Saving plays an important part in everyone’s life. There are numerous saving options available for the common individual like saving account, gold, and other asset class to put their savings. But tax saving schemes are also one of the best options to preserve wealth. One of the most important debates about tax saving investment is the ULIP (Unit linked insurance scheme) versus the ELSS (Equity Linked saving scheme). Both schemes are quite lucrative for tax saving purposes, but before investing one must align the financial objectives and goals to these schemes. A comparison between them will help you, which one suits best for your financial goals.
- Product Details:
ULIP stands for Unit Linked Insurance Scheme is mainly an insurance cum product sold by insurance companies. In this, one part is used for ensuring the investor, while the other part is invested in the product of his/her choice. They can choose to invest in equity, debt, hybrid or money market through it. On the other hand, ELSS is a diversified equity fund scheme, which mainly invests in stocks. It is purely an investment option that doesn’t offer any insurance.
- Tax Benefit and Incentive:
ELSS and ULIP both offer tax incentive features. They are eligible for deduction upto Rs 1.5 lac under Section 80C of Income Tax. But apart from that, ULIP returns are also tax free, after it serves the maturity period.
In the case of ELSS, the lock-in period is three years, whereas in the case of ULIP, the lock-in period is five years. While one cannot quit the ULIP, you can discontinue the premium, wherein a discontinuance charge is levied, and the balance amount is moved to a discontinuation fund. However, it is highly recommended to stay invested for large periods, as data show it has provided better returns during the long term.
- Option to Switch:
One of the key considerations for an investor is regarding the flexibility of switching the investment. ULIP offers a switching option to their investor, in which an investor can alter the ratio of the invested amount in either of the funds i.e. equity, debt and hybrid. It provides the investor flexibility to shift their funds in either of them at different stages of life. In the case of ELSS, there is no such option as once your investment is done, you can’t touch the investment before the lock-in-period.
- Charges and Transparency:
In the case of the ELSS Scheme, exit load and fund management charges are specified in the SID (Scheme Information Document). So, it becomes quite easy for the investor to calculate the returns. In the case of ULIPs, the majority of the charges (approx. 60%) are incurred in the first few years. Some of the charges include a premium allocation charge, mortality charges, fund management fees, policy administration charge and service tax deduction. In order to get good returns, one must stay invested for 10-15 years’ time period.
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*Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.