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ULIP Vs ELSS- The Tax-Saving Investment Schemes

In this highly productive generation, In India, the total amount of the Income Taxes can be somewhat reduced by investing smartly in the tax saving schemes. There is a various number of Tax Savings Schemes or Plans from which an individual can choose. These tax-saving options are provided by many Government and Private Organizations to the Indian Residents. There are multiple numbers of opportunities to reduce an individual’s tax burden, out of which the ULIP and the ELSS are one of the best tax-savings schemes introduced in India.

In this article, we are going to provide you a brief description of this schemes and compare the features and different qualities of these tax- saving schemes.

ULIP Saving Schemes

The ULIP stands for Unit Linked Insurance Plan. This is a product that is offered by the Insurance Companies, unlike the Insurance Policy it gives the investors both Insurance and Investment under a single integrated plan. It allows a maximum exemption of Rs 1 Lakh per year under the Section 80 C.

In short, ULIP is a life insurance product, which provides a risk cover to the policyholder along with the investment options to invest in different qualified investments such as stocks, bonds or mutual funds. This provides a dual benefit of Investment Opportunity along with the Insurance Coverage.

ELSS (Equity Linked Savings Schemes)

The ELSS stands for the Equity Linked Savings Schemes. These are the tax- saving mutual funds that can be used to reduce the taxable income by up to 1.5 Lakhs under the Section 80C of Income Tax Act 1961.

It is a type of diversified equity mutual fund and offers capital appreciation as well as tax benefits. It comes with a lock period of 3 years.

Differences between the ULIP and ELSS

People get confused often with these two products as both the schemes are tax-saving instruments.

ULIP Vs ELSS

The ULIP is an Insurance cum Investment product which is sold by the Insurance Companies. The ULIP Investors have an option to invest in equity, hybrid and money market funds. The minimum sum assured is 10 times the annual premium. It is seven times the annual premium if the age of entry is above 45 years.

Whereas the ELSS is an equity-linked saving scheme, these are the diversified equity funds that invest in stocks. These are pure investment schemes and they do not provide any insurance.

Charges and Transparency

The ELSS Funds have only one charge, which is called as the fund management fee or the expense ratio. This is around 3% and is adjusted in the Net Asset Value of the Scheme. This is not charged separately. Through this, you get to know that how much amount you have invested and you can also calculate the return, leading to a high transparency in the transaction process.

In ULIPs, almost 60% of the charges are incurred in the premium allocation charge, mortality charge, fund management fee, policy administration charge, fund switching charge and service tax deduction. The rest amount of the money is invested in the market. As the charges start reducing after 3-4 years, the investment and the returns will be very low.

For getting good returns you need to stay in an investment period of 10-15 years. The transparency is too low as you do not know the exact amount that is being invested. Also, there are some charges that are levied by reducing the units, not deducting from NAV, but further reducing the transparency.

Tax Deductions

Both the instruments are eligible for the tax deductions of up to Rs 1.5 Lakh under the Section. The ELSS scheme follows the EEE mode, wherein, the investment, capital gains and maturity amount are tax-free. These are because you are locked-in for 3 years, resulting in the long-term capital gains, which provides zero taxation for the equity investment.

In case of ULIPs, if you surrender before the lock-in period, any deduction claimed earlier is reversed as you have to pay tax. The maturity amount is tax-free only if in case of the death of the Policy Holder. But if the premium is more than 10% of the assured sum, then the maturity is added to the insured income and taxed at an applicable rate. If the premium is more than 10% of the assured sum then the proceeds for a year exceed Rs 1 Lakh and a tax of 2% is deducted from the source.

Lock-n Period

The ULIPs have a lock-in period of 5 years, whereas ELSS has a Lock-in period of 3 years. If you cannot quit the ULIP, then you can discontinue the premium. A discontinuance charge is levied and the funds (balance amount) are moved to the discontinuation fund.

In ELSS Funds, you cannot withdraw the amount before 3 years. It is not advisable to quit the ULIP or ELSS after the lock-in Period because the returns are more beneficial if the equity investment terms are for a longer period of time such as 7-10 years. For ULIPs, the ideal period is 10-15 years.

Switching Option

The ULIPs offers a switching option, which means that you can alter the ratio of the invested amount in different funds (equity, debt hybrid etc.) The scheme allows you to shift the funds on the basis of the risk exposure at different stages of life. So while you are young, you can have a higher amount of equity, but along with the age, you can switch the funds. You can also switch the funds if there is a decrement in the market.

In case of ELSS, there is no switching option. You are not allowed to touch the funds before the lock-in period. But you can opt for the dividend option to ensure the periodic booking of the profits.

Other Comparisons

Features ULIPs ELSS
 

Concept

It is an Insurance cum Investment Product  

A pure Investment product

 

 

Objective

This is an investment product that provides leverage to enjoy the investment benefits along with the tax relief along with the life coverage.  

A professionally managed fud that provides the benefits from the diversified equity investments.

 

Regulator

 

 

IRDA

 

SEBI

 

Loyalty Additions

 

The Loyalty additions are applicable for staying invested through the policy term depending upon the policy terms and conditions  

There is no such loyalty additions applicable.

Risk High Risk, Capital and Return are not guaranteed but life coverage is guaranteed High Risk, returns depends on the performance of the broader markets and fund manager.

Thus, if you are looking for a short-term investment with a good growth option then ELSS is a good option. As the returns expected from the equity market is comparatively higher than that of the investment classes.

But if you wish to maintain an investment in order to meet your personal needs such as children education, marriage etc. then choosing ULIP is a good option. As the ULIP provides a long-term investment for a period of 12-15 years. It also provides an insurance coverage, which in result provides an overall security and protection. Hence while choosing a ULIP or an ELSS, one should always keep in mind about the Financial Goals and Investment objective.

Common Mistakes While Investing On ELSS

If you are planning to save your taxes, then mutual funds are the best option. While different mutual funds are tax-efficient, not all of them provide tax benefits. Equity Linked Savings Schemes is one category of Mutual Funds which provide the investors with the tax benefits.

Equity Linked Savings Schemes are the type of open minded and diversified equity schemes that are offered by the mutual funds in India. These schemes offer tax benefits under the section 80C of Income Tax Act 1961.

With the tax saving season has just arrived, a lot of people are planning to invest their savings in equity linked saving schemes, where they receive equity like returns along with the benefit of tax savings. However, the investors make quite a lot mistakes while investing in this sort of Funds. Today, we are going to learn about some of the common mistakes while investing in ELSS.

Be Picky While Choosing Schemes

This rule can be applied for all the Mutual Funds. When you are planning for making an investment make a research. Experts say that never judge any scheme based on its performance for the last 6months to 1 year. Always choose the plan or scheme which has a consistent performance for the last 4-5 years. People may get tempted seeing the performance of the scheme and will not think twice to invest on it. This can be uncertain. It may be possible that the same scheme can underperform the next year and can put you in a loss. So, it’s better to bet on the schemes that remain consistent for a longer period of time.

Don’t Get Compelled with The Returns

Never go for an investment scheme that does not match your saving scheme style. It is very important to pick up an investment style. This can be a bit risky because you are risking a lot of money on it.

Beginning Late in The Year

Many of the people start investing in ELSS Funds at the end of the financial year. This is a huge mistake. It is a poor strategy for saving money. This could lead to the cash flow issues at the end of the year. Another big problem is that investing money at the end of the financial year forces the investor to invest a lump sum amount. This technique can be a huge risk. This can create risk in the market timing. If the equity position is at a good stake then it can result in high valuations. The investors can end up purchasing the units at high valuations which in turn affects its return.

Don’t Mix Up Too Many Schemes

There’s a famous saying that “Too Much of Anything is Bad”. Same goes for the ELSS investment scheme. Some of the investors invest in different ELSS in every year. If you are good at arranging things at order then go ahead. Get one each year. But having multiple numbers of funds at the same time can be difficult to manage and can lead to a confusion when it comes to monitoring the portfolios. If you are inefficient to managing the funds then better to skip that.

Don’t Fall into The Dividend Trap

It has been observed many times that the investors get trapped in the cave of the Dividend trap while investing in ELSS. But the matter of fact is that the dividend is paid to you from your money. Until and unless you are not in the need of periodic of income do not take the risk for choosing a dividend option. If your goal is to create wealth, then you must stick to the “Growth Option”.

Do Not Redeem Quickly After Lock-In Period

The ELSS Scheme offers a 3 year- lock-in program and many of the investors try to retrieve the cash as soon as the Lock-in Period gets over. But you don’t have to do this if your fund runs extremely well. So, it’s better that you stay invested and save for a time period of 5-7 years for a good healthy return amount.

Do Not Invest Only for Savings Tax

Though the Equity Linked Savings Schemes are quite tax-friendly and provide you with quite efficient tax benefits. But at the end of the day, they are Equity Taxes. They can be quite risky as well as rewarding. So, when you are planning to make an investment on ELSS, make sure that you take a look at the other things like risk performance, lock-in period etc.

 

Do Not Make a Switch Frequently

It is often found that the investors make the switch after every three years. This jumping from one fund to another fund just because it is giving a good performance than the other funds is not a good idea to invest in ELSS. If you think that your fund is underperforming, then there could be many other reasons behind that- which may be because of the size of the fund etc. So, when you think that your fund is under performing then instead of market blooming for a long time, try to move from one fund to another.

 

Thus, investing in the equity schemes are no doubt profitable but they can also cause you risk in investing your money. So before jumping into the investment well, have a little research work done. Know about the do’s and don’ts of the different schemes. In short, Invest Smartly, which can help you in future.

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