Tax Season is around the corner & it is that time of the year when most investors look for various financial products to claim deductions under the Income Tax Act, 1961. Traditionally, Indian investors have been choosing either bank FD or PPF as a preferred option for Tax saving, albeit ELSS & ULIP are two unconventional high in demand innovative investment products available today in the Indian Financial market.
ELSS & ULIPs prime investment objective is tax saving, yet the two are entirely different Investment products. Both investment products offer different returns and have different risk categorization. A layman usually gets confused between the two products. If you are merely looking for Tax savings & Wealth Creation, then you should invest in ELSS or Equity Linked Saving Scheme, which is a type of Mutual Fund. You can use ULIP or Unit Linked Insurance Plan when you wish to appreciate your money and at the same time want life cover. ULIPs are quite risky investments options & offer Life Cover approximately ten times the premium paid by the investor. However, Advisors have a word of caution for ULIPs whose returns are less than Mutual Funds. If you looking for Life cover, Tax saving & Wealth Creation then it is better to invest separately in a term plan or traditional plan for Life Insurance & ELSS for Wealth Creation plus Tax Saving.
ELSS is the easiest means to grow your wealth & save tax. ELSS is a professionally managed fund driven by a Professional fund manager where money is pooled in by multiple investors & is invested primarily in equity, with the objective of attaining highest possible ROI. ELSS allows an individual to invest either in a Lump sum or in bits called as SIP.
ULIP (Unit Linked Insurance Plans) on the other hand is a mix of Insurance & Investments. ULIPs are regulated by IRDAI (Insurance Regulatory & Development Authority of India). The primary objective of the ULIPs is risk mitigation by a way of risk transfer & at the same time capital appreciation (Insurance + Wealth Creation). One part of your investment called as Premium is assigned to Life Insurance & the other towards a fund which will be invested in Equity, Debt or both depending on the investor’s long-term goal. You lose a lot in ULIPs due to high charges & a part of your premium going towards Life Insurance risk coverage.
So, if you want high ROI on your buck to invest in ELSS & if you want to protect your family from the financial crunch in your absence after your death then you should buy Term or Traditional Life Insurance Plans. Avoid ULIP altogether because mixing Insurance will investment does not make much sense.
Funds invested in ELSS & ULIPs are eligible for deductions under section 80C of the Income Tax Act, 1961. The total deduction that can be availed under section 80C is Rs 150000. An investor can thus invest Rs 150000 in ELSS/ULIPs & claim the entire amount although he or she is free to invest an amount more than Rs 150000 in ELSS. However, an amount equivalent to Rs 150000 is only available for deductions and this includes your contributions in all Section 80 C Financial products like NSC, PPF, Mutual Funds etc you do in a particular financial year.
Now, look at some differences between the two financial products:-
1.Nature of the Product
ULIP: Insurance + Wealth Creation
( Entire Corpus is not invested because it gets divided )
ELSS: Pure Wealth Creation Product
( Entire Corpus is invested)
2.Lock in Period
ULIP: 5 Long Years
ELSS: Just 3 Years
3.Investment Frequency
ULIP: Single, Annual, Semi-Annual, Or Monthly Premium
ELSS: Lump Sum Or SIP, Preferably Monthly
4.Fees & Charges
ULIP: Premium Allocation, Mortality Charges, Policy Administration, Fund Management, Switching Fund, Surrender Charges.
ULIPs are a high-cost product
ELSS: Comparatively very cheap as compared to ULIPs
5. Tax
ULIP: Maturity benefits on ULIPs are tax-free, Returns are Tax-free too in case of Investor’s Death.
ELSS: LTCG On ELSS Gains In Excess Of Rs 1 Lakh Is Taxable @ 10% (Surcharge+HEC) Without Indexation.
Another Tax is Dividend Distribution Tax @10%
LTCG from debt funds is taxed at 20% after indexation.
6. Investment Allocation
ULIP: Equity, Debt Or Both (Lower Returns, Investors Cannot Switch B/W Funds)
ELSS: EQUITY ( Returns Will Be High & Investors Can Switch Funds )
7. Expected Returns
ULIP: Average Large Cap ULIP Plan grew by only 15.51% last year
(Annualized return 14.42)
ELSS: Average Large Cap MF rose by 18.33% last year
(Annualized return 15.25%)
8. Liquidity
ULIP: Low Liquidity Due To 5 Year Lock-In
ELSS: High Liquidity
9. Transparency
ULIP: ULIPS Are Opaque With Complex Charges
ELSS: Simple & Accessible
10. Average Time Horizon ( for booking profits)
ULIP: 10–15 years
ELSS: 7–10 years
11. Product Regulator
ULIP: IRDAI
ELSS: SEBI
Investors generally prefer financial products which give tax-free returns. But, these tax-free financial products also give low returns. Even after the introduction of LTCG & Dividend Distribution Tax in 2018 Budget, Mutual funds should remain the investor’s first choice, & not the tax-free ULIP policies. Financial planners have advised investors against investing in ULIP plans because Investors should not combine insurance and investments in one product. An Insurance Policy should only serve the purpose of risk mitigation & provide protection to the family or dependent in case of investor’s demise and a Mutual Fund Plan should be used for Wealth Creation.
ULIP is a mis-sold product. It is sold as an Investment Plan, though it is only an INSURANCE PLAN. Banks, Insurance Companies & Agents have been selling these ULIP products aggressively as an Investment Product only because of HIGH COMMISSIONS they receive from MIS-SELLING. Do not forget the large number of charges which these Insurance Company deduct from your hard-earned premiums.
Investors should not get into the trap of trap of Tax-free returns because then they would end up with only limited insurance coverage and self-deprecating returns in ULIP. Secondly, it is not easy to withdraw from ULIPs because of poor performance, as one would lose insurance cover in the process.
If you still have doubts contact our Financial Advisor
ELSS & ULIPs prime investment objective is tax saving, yet the two are entirely different Investment products. Both investment products offer different returns and have different risk categorization. A layman usually gets confused between the two products. If you are merely looking for Tax savings & Wealth Creation, then you should invest in ELSS or Equity Linked Saving Scheme, which is a type of Mutual Fund. You can use ULIP or Unit Linked Insurance Plan when you wish to appreciate your money and at the same time want life cover. ULIPs are quite risky investments options & offer Life Cover approximately ten times the premium paid by the investor. However, Advisors have a word of caution for ULIPs whose returns are less than Mutual Funds. If you looking for Life cover, Tax saving & Wealth Creation then it is better to invest separately in a term plan or traditional plan for Life Insurance & ELSS for Wealth Creation plus Tax Saving.
ELSS is the easiest means to grow your wealth & save tax. ELSS is a professionally managed fund driven by a Professional fund manager where money is pooled in by multiple investors & is invested primarily in equity, with the objective of attaining highest possible ROI. ELSS allows an individual to invest either in a Lump sum or in bits called as SIP.
ULIP (Unit Linked Insurance Plans) on the other hand is a mix of Insurance & Investments. ULIPs are regulated by IRDAI (Insurance Regulatory & Development Authority of India). The primary objective of the ULIPs is risk mitigation by a way of risk transfer & at the same time capital appreciation (Insurance + Wealth Creation). One part of your investment called as Premium is assigned to Life Insurance & the other towards a fund which will be invested in Equity, Debt or both depending on the investor’s long-term goal. You lose a lot in ULIPs due to high charges & a part of your premium going towards Life Insurance risk coverage.
So, if you want high ROI on your buck to invest in ELSS & if you want to protect your family from the financial crunch in your absence after your death then you should buy Term or Traditional Life Insurance Plans. Avoid ULIP altogether because mixing Insurance will investment does not make much sense.
Funds invested in ELSS & ULIPs are eligible for deductions under section 80C of the Income Tax Act, 1961. The total deduction that can be availed under section 80C is Rs 150000. An investor can thus invest Rs 150000 in ELSS/ULIPs & claim the entire amount although he or she is free to invest an amount more than Rs 150000 in ELSS. However, an amount equivalent to Rs 150000 is only available for deductions and this includes your contributions in all Section 80 C Financial products like NSC, PPF, Mutual Funds etc you do in a particular financial year.
Now, look at some differences between the two financial products:-
1.Nature of the Product
ULIP: Insurance + Wealth Creation
( Entire Corpus is not invested because it gets divided )
ELSS: Pure Wealth Creation Product
( Entire Corpus is invested)
2.Lock in Period
ULIP: 5 Long Years
ELSS: Just 3 Years
3.Investment Frequency
ULIP: Single, Annual, Semi-Annual, Or Monthly Premium
ELSS: Lump Sum Or SIP, Preferably Monthly
4.Fees & Charges
ULIP: Premium Allocation, Mortality Charges, Policy Administration, Fund Management, Switching Fund, Surrender Charges.
ULIPs are a high-cost product
ELSS: Comparatively very cheap as compared to ULIPs
5. Tax
ULIP: Maturity benefits on ULIPs are tax-free, Returns are Tax-free too in case of Investor’s Death.
ELSS: LTCG On ELSS Gains In Excess Of Rs 1 Lakh Is Taxable @ 10% (Surcharge+HEC) Without Indexation.
Another Tax is Dividend Distribution Tax @10%
LTCG from debt funds is taxed at 20% after indexation.
6. Investment Allocation
ULIP: Equity, Debt Or Both (Lower Returns, Investors Cannot Switch B/W Funds)
ELSS: EQUITY ( Returns Will Be High & Investors Can Switch Funds )
7. Expected Returns
ULIP: Average Large Cap ULIP Plan grew by only 15.51% last year
(Annualized return 14.42)
ELSS: Average Large Cap MF rose by 18.33% last year
(Annualized return 15.25%)
8. Liquidity
ULIP: Low Liquidity Due To 5 Year Lock-In
ELSS: High Liquidity
9. Transparency
ULIP: ULIPS Are Opaque With Complex Charges
ELSS: Simple & Accessible
10. Average Time Horizon ( for booking profits)
ULIP: 10–15 years
ELSS: 7–10 years
11. Product Regulator
ULIP: IRDAI
ELSS: SEBI
Investors generally prefer financial products which give tax-free returns. But, these tax-free financial products also give low returns. Even after the introduction of LTCG & Dividend Distribution Tax in 2018 Budget, Mutual funds should remain the investor’s first choice, & not the tax-free ULIP policies. Financial planners have advised investors against investing in ULIP plans because Investors should not combine insurance and investments in one product. An Insurance Policy should only serve the purpose of risk mitigation & provide protection to the family or dependent in case of investor’s demise and a Mutual Fund Plan should be used for Wealth Creation.
ULIP is a mis-sold product. It is sold as an Investment Plan, though it is only an INSURANCE PLAN. Banks, Insurance Companies & Agents have been selling these ULIP products aggressively as an Investment Product only because of HIGH COMMISSIONS they receive from MIS-SELLING. Do not forget the large number of charges which these Insurance Company deduct from your hard-earned premiums.
Investors should not get into the trap of trap of Tax-free returns because then they would end up with only limited insurance coverage and self-deprecating returns in ULIP. Secondly, it is not easy to withdraw from ULIPs because of poor performance, as one would lose insurance cover in the process.
If you still have doubts contact our Financial Advisor
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