ULIP vs ELSS – A Comparative Analysis

12 January 2023
6 min read

Equity-Linked Savings Schemes (ELSS) and Unit-Linked Insurance Plans (ULIP) are investment options that offer tax benefits under Section 80C of the Income Tax Act in India. However, there are some critical differences between the two.

ELSS is a type of mutual fund that invests primarily in equity shares of companies listed on a stock exchange. The returns on these funds are market-linked and tend to be higher than those of fixed deposits and other fixed-income investments.

However, the returns are also subject to market fluctuations, and there is a risk of losing money. In addition, ELSS funds have a lock-in period of 3 years, which means that the invested capital cannot be withdrawn before the completion of three years.

ULIP, on the other hand, is a type of insurance product that also offers an investment component. The premium paid for a ULIP policy is invested in various fund options, such as equity, debt, or a mix of both.

ULIPs also offer life insurance coverage, and the death benefit paid out is the higher of the sum assured or the fund value. In addition, ULIPs have a lock-in period of 5 years, which means that the invested money cannot be withdrawn before the completion of five years.

Difference Between ULIP And ELSS

ELSS is a pure investment product, while ULIP is a combination of insurance and investment product. The lock-in period is also different. ULIP has a lock-in period of 5 years compared to 3 years for ELSS.

It's important to note that the returns on ULIPs may be lower than those of ELSS funds, as a portion of the premium is used to cover insurance charges.

Let us understand ULIP and ELSS difference in detail here.

  • Tax Benefits

Equity-Linked Savings Scheme (ELSS) and Unit-Linked Insurance Plan (ULIP) offer tax benefits to investors. However, the benefits are different.

ELSS is a type of mutual fund investment that offers tax benefits under Section 80C of the Income Tax Act. LTCG under ELSS is taxed at 10% on and above Rs 1 lakh. However, the returns on ELSS investments are also tax-free.

ULIP, on the other hand, is an insurance product that offers investment options. The premium paid for a ULIP is eligible for tax deductions under Section 80C of the Income Tax Act up to a limit of Rs 1.5 lakh. The returns on ULIP investments are taxed per the investor's income tax slab.

  • Charges

The fund management charges for ELSS are typically around 2.5% of the assets under management (AUM) per year. There may also be additional charges, such as fund management charges, transaction charges, and exit load.

The charges for ULIPs are typically higher than ELSS. Several types of accounts are associated with ULIPs, including premium allocation charges, fund management charges, mortality charges, and administrative charges. These charges can vary depending on the specific ULIP plan, but they can add up to as much as 20% of the premium in the first year and gradually decrease in later years.

  • Liquidity

Equity-Linked Savings Scheme is a mutual fund invested primarily in companies' equity shares. These funds have a lock-in period of 3 years, during which the investor cannot withdraw the invested amount. However, the investor can withdraw the invested amount or sell the units on the stock exchange after the lock-in period.

A Unit-Linked Insurance Plan is a combination of insurance and investment. Investors can choose to invest in different funds, such as equity, debt, and balanced funds. The lock-in period for ULIPs is usually 5 years, during which the investor cannot withdraw the invested amount. However, the investor can withdraw the invested amount or surrender the policy after the lock-in period.

Regarding liquidity, ELSS funds offer more flexibility as they have a shorter lock-in period and can be sold on the stock exchange. ULIPs, on the other hand, has a more extended lock-in period, and the investor needs to surrender the policy to withdraw the invested amount.

  • Returns

Equity-Linked Savings Scheme is a mutual fund that invests primarily in equities and equity-related securities. The returns generated by ELSS are based on the performance of the underlying equity market.

When the market is performing well, ELSS funds tend to generate higher returns, and when the market is performing poorly, ELSS funds tend to generate lower returns.

Unit-Linked Insurance Plan is an insurance product that combines life insurance coverage with investment options. The returns generated by ULIP are based on the performance of the underlying investment options, which can include equities, bonds, and other securities. ULIPs tend to generate lower returns than ELSS funds because a portion of the investment goes toward providing life insurance coverage.

Both ELSS and ULIP can generate returns based on market performance. Still, ELSS is a pure investment option that produces higher returns than ULIP, which combines investment and insurance. Therefore, evaluating your investment needs and risk appetite is essential before choosing between these options.

  • Lock-in Period

The lock-in period for Equity-Linked Savings Scheme (ELSS) is 3 years, whereas the lock-in period for Unit-Linked Insurance Plan (ULIP) is usually 5 years. This means that the investment in an ELSS can be liquidated after 3 years, whereas the investment in a ULIP cannot be liquidated before 5 years. 

The lock-in period is in place to ensure that investors stay invested for a more extended period, allowing them to reap long-term investment benefits. It also helps prevent premature withdrawal of funds, which can affect the investment's overall performance.

Comparative Analysis ULIP vs ELSS

Factors

ULIP (Unit-Linked Insurance Plan)

ELSS (Equity-Linked Savings Scheme)

Tax Benefits

Tax deduction under Section 80C. Gains taxable.

LTCG under ELSS is taxed at 10% on and above Rs 1 lakh

Charges

On policy administration, premium allocation, mortality, etc.

Exit load and fund management charge

Liquidity

Funds can be available after the lock-in of 5 years, subject to other policy conditions.

Funds will be available after the lock-in of 3 years.

Returns 

Returns can vary

Returns depend on the scheme (12%-14% Approx)

Lock-in period

5 years

3 years

Conclusion

In conclusion, ELSS vs ULIP are great investment options for those looking to grow their wealth over time. Both options offer the potential for high returns, diversification, and tax benefits. However, they also come with their own set of pros and cons.

Ultimately, the choice between ELSS and ULIP will depend on your investment goals, risk appetite, and financial situation. Therefore, it is essential to understand each option's features and benefits before deciding. It is also advisable to consult with a financial advisor to help you make an informed decision.

You May Also Be Interested to Know-

1.

Top Performing ELSS Mutual Funds to Invest

2.

Things to Know Before Investing in ELSS Funds

3.

Best ULIP Plans in India

4.

ULIPs vs Mutual Funds - Which is the Better Investment Option

5.

ULIPs vs PPF vs MF : A Comparative Analysis

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.

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Research Analyst – Himanshu Sinha

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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