ULIP vs. ELSS – which is a better investment option in 2023?


5 min read

Most people have this confusion when it comes to choosing between ULIP vs ELSS. In this post, we are discussing the ULIP vs ELSS to help you make a better choice while buying a plan. Read on!

Though ULIP or Unit Linked Insurance Plan and ELSS or Equity Linked Saving Scheme vary from each other and serve different insurance purposes, they still add to the confusion of consumers when it comes to making a choice. To see what works best for you, it is important to align your purpose/goal of the investment with both the plans to confirm which one would work in your case.

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Though ULIP and ELSS are two diverse policies, they have certain similarities too, such as:

  • Both these policies are long term plans which serve long term investment purposes of policyholders
  • Both the plans allow tax benefits to the insured
  • Both have lock-in period and allow equity exposure

However, the key difference between the two comes in the form of terms and conditions of tax benefits.  Also, there is a difference in terms of costs and loading charges involved in both the policies. Let us consider the two plans to be able to select the best one suiting your needs.

ULIP vs. ELSS – Key Differences

Below are some differences between ULIP and ELSS plans:

Differences ELSS ULIP
Aim of plan These are professionally managed funds Offer dual benefit of investment and life coverage
Return on Investment Can vary depending on scheme Can vary depending on investment combination chosen
Lock-In Period 3 years 5 years
Tax Deduction Available under 80C Available under 80C
Liquidity High Low
Charges Fund management, exit load etc. Policy administration, premium allocation etc.
Transparency Fully transparent Flexible and transparent
Risk High risk High risk (less as compared to ELSS)
Loyalty No loyalty additions offered Loyalty additions offered
Regulator Regulated by SEBI Regulated by IRDA

Taxability under ULIP vs. ELSS

When it comes to taxability both ULIP and ELSS allow tax deductions under section 80C.

ULIP allows tax exemption of up to INR 1.5 lakh under section 80C. However, if the insured surrenders the policy before the 5 year lock-in period, the amount will be taxable.

In case of ELSS, the policyholder receives tax benefit of up to INR 1.5 lakh under section 80C. Here the policyholder can keep investing even after the lock-in period of 3 years.

Read More: Top Benefits Of Investing In Unit-Linked Insurance Plans (ULIP)

What is ULIP? Is it a Better Investment Plan?

ULIPs are dual purpose insurance plans that also serve the investment purpose of investors. Here, a certain amount of the sum assured is invested in the market to enhance wealth. The policyholder can choose any plan to invest, from among the various plans such as equity, debt, hybrid funds etc. They can even switch between funds.

ULIPs are good plans when it comes to long term investments. One can meet their financial goals in the long run with ULIPs such as buying a house, marriage of children and so on. These policies offer better returns as compared to Fixed Deposits and many other investment plans.

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Things to know  About ULIP

ULIPs are unique plans because they allow both the benefits of investments and insurance.

  1. In the beginning of the plan, the premium paid for ULIP policy is used to  meet the insurance needs of the policyholder as well as other policy related expenses
  2. Later in the plan, the premium amount paid by insured is divided between investments (in various plans) and for coverage of life insurance
  3.  ULIP policy involves certain charges for managing fund, for allocation of premium, mortality charges as well as administration charges etc.

Also Read: What is the meaning of absolute returns in ULIPs?

What is ELSS ?

ELSS  is a mutual fund that comes with a lock-in period of three years and is regarded as a diversified scheme of equity. Offered by Mutual Funds in India, the plan allows tax benefits under section 80C of Income Tax Act, 1961. However, the returns earned from ELSS are taxable. The money under an ELSS is generally invested in the capital market in stocks. An investor can earn returns in the range of 14- 20% or more every year under this high risk plan depending on the scheme invested.

Despite being a type of mutual fund, there are some differences between an ELSS and Mutual Funds in other categories such as SIP, Equity Mutual Fund etc.  The key variations are in the form of tax benefits received and lock-in period.

Things to know About ELSS

  • An investor can invest an unlimited amount in ELSS but the tax deduction is available only up to INR 1.5 lakh. Further, the returns on investment are also not exempted from tax
  • The investor can continue with the ULIP investment even after the lock-in period of 3 years
  •  ELSS is a high-risk option of investment with high returns as compared to other tools of investments such as FD, PPF etc.
  • People looking for short lock-in period plans with greater returns can invest in ELSS
  • There are differences between ELSS vs. Mutual Fund in other categories like SIP, Equity etc.

Read More: 11 ULIP Charges You Should Be Aware Of

To Sum Up

When comparing ELSS vs. ULIP or ELSS vs. Mutual Fund which is better, the main distinctions come in the form of tax benefits. ULIP is an insurance cum investment fund, whereas mutual funds are professionally managed schemes operated by Fund Managers.

Further, when you compare between an ELSS and other mutual fund investments, there are differences in terms of tax benefits and lock-in period among others. So, it depends on the discretion and requirement of the investor and his/her needs to confirm which plan would suit their needs better.

Since some of these plans are highly risky, it is very important to understand them well before investing. You can even take the help of insurance and investment advisors to have a better idea of the investments you should carry on.

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Which is better, ULIP or ELSS?

Both the investment plans have their own benefits and limitations. ELSS allow more liquidity with less lock-in period as compared to ULIPs. However, ULIPs allow dual benefits of insurance and investments. ELSS are highly risky as compared to ULIP.

Is ULIP the same as ELSS?

No, ELSS mutual funds and ULIPs are different investment plans with varying differences between each other. ULIP is an insurance product, whereas ELSS is a mutual fund. 

Are ULIP risky?

ULIP is a risky investment. However, it is less risky as compared to ELSS and many other investment options. 

Is ULIP good for tax saving?

Yes, ULIPs allow tax benefit of up to INR 1.5 lakh under section 80C of Income Tax Act, 1961.

What are the disadvantages of ULIP?

Some disadvantages of ULIPS include:

ULIPs have a high cost attached at the start of the plan because of the various charges levied under the plan.  They are complex to understand as well.
Market fluctuations don't allow much profit under ULIP if invested for a short term.
There might be switching charges levied by many investors for switching investment options under a ULIP plan
The Lock-in period of 
ULIP is 5 years during which the investor cannot withdraw money.

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Dec 16, 2022
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PayBima Team
PayBima is an Indian insurance aggregator on a mission to make insurance simple for people. PayBima is the Digital arm of the already established and trusted Mahindra Insurance Brokers Ltd., a reputed name in the insurance broking industry with 17 years of experience. PayBima promises you the easy-to-access online platform to buy insurance policies, and also extend their unrelented assistance with all your policy related queries and services.

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