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ULIP vs ELSS: 5 Ways in Which they Differ
The two products are often confused because both are tax saving instruments. Here’s what you should
know before putting your money in either:
1. Ulip vs ELSS
Ulip is insurance cum investment product sold by insurance
companies. Ulip investors have the option to invest in equity,
debt, hybrid, and money market funds. The minimum sum
assured is 10 times the annual premium (seven times if age of
entry is above 45 years). On the other hand, ELSS, or equity
linked saving schemes are diversified equity funds that invest in
stocks. These are pure investment instruments and don’t offer
any insurance. The confusion between the two is probably
because both make investments in equity markets and are tax-
saving instruments. However, one should be clear about one’s
objective and not mix insurance with investment.
2. Charges & Transparency
ELSS funds have only one charge, which is the fund management fee or expense ratio. This is a
maximum of 2.5% and the cost is adjusted in the NAV of the scheme, not charged separately. This
means that you know exactly how much amount was invested and can calculate your return, leading
to high transparency in transaction.
In Ulips, almost 60% of the charges are incurred in the first few years, including the premium
allocation charge(percentage of premium for charges before allocating units, initial and renewal
expenses and agent commissions); mortality charge (insurance cost); fund management fee; policy
administration charge; fund switching charge and service tax deduction. The remaining money is
invested in the market. As the charges start reducing only after 3-4 years, the investment and, hence
returns will be very low. To get good returns, you need to stay invested for at least 10-15 years. The
transparency is low since you do not know the exact amount being invested. Also, some charges are
levied by reducing the units, not deducting from NAV, further reducing transparency.
3. Tax Treatment
Both instruments are eligible for deduction of upto Rs 1.5 Lakh under section 80C. ELSS funds
follow the EEE mode, wherein investment, capital gains and maturity amount are tax free. This is
because you are locked in for three years, resulting in long term capital gains, which invite zero
taxation for equity investment.
As for Ulips, if you surrender before the lock in period, any deduction claimed earlier is reversed and
you have pay tax. The maturity amount is tax free only on death of the policyholder. If the premium is
more than 10 % of sum assured, the maturity proceeds are added to the insured’s income and taxed at
applicable rate. If the premium is more than 10 % of sum assured and the proceeds for a year exceed
Rs 1 Lakh, tax of 2% is deducted at source.
4. Lock in period
Ulip have a lock in period of five years, whereas in ELSS, your investment remains locked for three
years. This means that if you exit before this period, you will have to surrender charges in case of
Ulip. This is usually calculated as a percentage of fund or annualized premiums. It is higher if you
quit early and keeps getting lower with time. In ELSS funds, since you cannot withdraw before three
years, no exit load is applicable. However, it is not advisable to quit Ulip or an ELSS fund even after
the lock in period because equity investment gives the best returns in the long term of 7-10 years. In
case of Ulip, this period is ideally 10-15 years.
5. Switching Option
Ulips offer a switch option, which means that you can alter the ratio of invested amount in different
funds (equity, debt, hybrid, etc). This allows you to shift your funds as per the risk exposure at
different life stages. So while you are young, you can have a higher amount in equity, but with age
you can shift to debt. You can also switch out of equity if you expect the markets to fall. Remember,
however, that there may be a limited number of free switches. In the case of ELSS, there is no such
option and you can’t touch the investment before the lock in period. However, you can opt for the
dividend option to ensure periodic booking of profits.
- By Mohit Saboo
Email ID – mohitsaboo30@gmail.com