ELSS versus ULIPs : Which is the better tax saving option?

ELSS versus ULIPs

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ELSS versus ULIPs : The imposition of 10 percent tax on LTCG earned on mutual funds could be a trigger for ULIPs

ELSS versus ULIPs : One of the big debates about tax saving investment is the unit linked insurance scheme (ULIP) versus the equity linked savings scheme (ELSS) debate. There are some similarities and some differences too. For example, both ELSS and ULIPs combine tax saving with a long term investment perspective. Both ELSS and ULIPs give you an access to equities and both entail a lock in. However, there are some differences on the tax front, especially after the Union Budget 2018-19. Also in terms of loading and costs there is a distinct difference between ELSS and ULIPs. So how should one take a decision?

How ULIPs became a victim of mis-selling over the years?ULIPs have an interesting history in the Indian markets. To begin with, most investors did not realize the difference between a ULIP and a mutual fund. The problem was that it was largely mis-sold. Investors thought they were paying for the investment product whereas they were also paying for the insurance cover. Above all, the methodology of charging them was not too transpare

nt. Union Budget 2018-19, it is believed, could give ULIPs some hope of a revival. The imposition of the 10% tax on long term capital gains (LTCG) earned on mutual funds could be a trigger for ULIPs. Remember, ULIPs have been exempted from the ambit of LTCG tax and that will only be applied to direct equities and equity mutual funds. ELSS versus ULIPs

Forget the Union Budget; ELSS still can beat ULIPs by a marginWhile it is true that the Union Budget 2018-19 did impose LTCG on ELSS but spared ULIPs, that is unlikely to make a substantive difference to the final calculations. There are eight reasons why ELSS could continue to be the tax saving instrument of choice ELSS versus ULIPs

1. A good investment product is defined by its transparency with regards to the loads, initial costs and the transparency of the portfolio. ULIPs really do not cover themselves in glory. Data about ULIPs is not as widely available and tracked as compared to mutual funds. Hence, it is difficult to find the best performing ULIP suitable for you.

2. Should you buy ULIPs because it combines insurance and investment? That is never a great idea fundamentally. From a financial planning perspective it is always better to keep your insurance and investments separate. The best thing is to buy ELSS for your tax saving and growth and buy a term policy separately for life cover. ELSS versus ULIPs

3. A logical corollary to the previous point. When you buy ELSS and a term policy, remember that both are eligible for exemption under Section 80C of the Income Tax Act. So you are really not losing out on anything.

4. You need to ask yourself a more fundamental question. Will there really be a major impact on your returns. Mutual Funds have consistently delivered good performance over the last 20 years. ELSS versus ULIPs

5. ULIPs have a lock-in period of 5 years. ELSS is liquid after completion of 3 years. You effectively get the same benefit in a span of 3 years. You can choose to re-invest in a different ELSS scheme after 3 years if you are not happy with the performance. ELSS versus ULIPs

6. This is interesting. Over a 15 year period, you can recycle your ULIP investment only for three tax benefits. At the same time, your ELSS can be recycled five times in the same period. That surely makes your ELSS a better tax planning tool in the long run. ELSS versus ULIPs

7. Once you start a ULIP, you have to keep paying premium every year till the defined premium paying term. Whereas, in ELSS, you can choose to make an investment as per your choice. There is no compulsion to continue it every year.

8. The ULIP can become as profitable as a mutual fund only after 10 years of holding, if you look at it on a post-tax basis. Till then the upfront loads on ULIPs are too high. Therefore, there is no advantage in opting for ULIPs over ELSS even after considering LTCG Tax.

Notwithstanding the LTCG tax on ELSS funds, they are a more useful product for your financial plan compared to ULIPs. The choice is quite clear for you! ELSS versus ULIPs

Choosing between ELSS and ULIPs depends on your priorities: potential for higher returns and flexibility versus insurance coverage and tax benefits. Here’s a breakdown to help you decide: ELSS versus ULIPs

ELSS (Equity Linked Saving Scheme)

  • Type: Pure investment product (mutual fund)
  • Investment: Primarily in equities (stocks)
  • Returns: Potentially higher returns due to equity exposure (historically higher than ULIPs)
  • Liquidity: Lock-in period of 3 years
  • Tax Benefits: Deduction under Section 80C (up to Rs 1.5 lakh), Long Term Capital Gains (LTCG) tax benefit on gains above Rs 1 lakh (10%)
  • Risk: Higher risk due to equity investment
  • Insurance Coverage: No life insurance coverage ELSS versus ULIPs

ULIP (Unit Linked Insurance Plan)

  • Type: Combination product (insurance + investment)
  • Investment: A portion goes towards insurance coverage, remaining is invested in chosen funds (debt, equity, or balanced)
  • Returns: Generally lower returns due to insurance component (may be higher if mostly invested in equity)
  • Liquidity: Lock-in period of 5 years (typically)
  • Tax Benefits: Deduction under Section 80C (up to Rs 1.5 lakh), Maturity amount paid tax-free (up to Rs 2.5 lakh) with certain conditions
  • Risk: Lower risk than ELSS (depends on fund choice)
  • Insurance Coverage: Provides life insurance coverage ELSS versus ULIPs

Here’s a quick decision chart to help:

FeatureELSSULIP
GoalHigh potential returns, tax savingTax saving, life insurance coverage
Risk ToleranceHighModerate to Low
Investment FocusEquityEquity, Debt, Balanced (mix)
ReturnsPotentially HigherGenerally Lower
Liquidity3 years lock-in5 years lock-in (typically)
Tax Benefits80C deduction, LTCG benefit80C deduction, Maturity amount tax-free (conditions)
InsuranceNoYes

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In conclusion:

  • Choose ELSS if you prioritize potentially higher returns, flexibility, and are comfortable with higher risk.
  • Choose ULIPs if you prioritize life insurance coverage along with tax benefits, and are okay with potentially lower returns and longer lock-in.

Remember, conduct your own research, understand your risk tolerance and investment goals before making a decision. ELSS versus ULIPs

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