ELSS Vs ULIP: What Should Be Your Preferred Tax Saving Option?

Are you unsure about whether to invest in a Unit Linked Insurance Plan (ULIP) or an Equity Linked Savings Scheme (ELSS)? As tax-saving instruments, these two investment options are often compared. However, they serve different purposes and have distinct features. In this guide, we will compare ULIP and ELSS, outlining their features, advantages, and limitations, to help you make an informed investment decision.

ULIP and ELSS: Understanding the Basics

ULIPs are insurance products that also offer investment opportunities. They are provided by insurance companies and allow investors to choose their preferred fund type based on their risk tolerance and investment objectives. On the other hand, ELSS is a type of mutual fund offered by Asset Management Companies (AMCs). ELSS schemes are purely investment-oriented and do not provide any insurance coverage.

Tax Benefits: ULIP vs ELSS

Both ULIPs and ELSS investments qualify for tax deductions under Section 80C of the Income Tax Act, up to Rs. 1.5 lakhs per fiscal year. Let’s have a closer look at how the taxation of gains differs between the two options:

– ULIP: If you surrender a ULIP plan before maturity, any tax deductions claimed on the premiums paid will be reversed, and you will have to pay taxes accordingly. The maturity amount is tax-free in case of the policyholder’s death during the policy term. If the premium paid exceeds 10% of the minimum sum assured, the maturity benefits received will be added to your taxable income. 

However, if the premiums paid are 10% more than the minimum sum assured and gains for a fiscal year exceed Rs. 1 lakh, a TDS of 2% is deducted at source.

– ELSS: The gains from an ELSS policy are tax-free. Profits up to Rs. 1 lakh (investment + capital gains + maturity benefits) are exempt from taxes. However, long-term capital gains beyond Rs. 1 lakh are taxed at a rate of 10%.

Charges and Fees: ULIP vs ELSS

ULIPs come with several charges such as premium allocation charges, agent commissions, policy administration charges, fund management fees, etc. However, these charges are typically higher in the initial years and decrease over time. It is important to note that the Insurance Regulatory Development Authority (IRDA) has capped the allocation and policy administration charges at a maximum of 2.25%.

On the other hand, ELSS schemes have only one charge – the expense ratio (fund management fee). The expense ratio is generally around 3% and is deducted from the Net Asset Value (NAV) of the scheme.

Fund Lock-in Period: ULIP vs ELSS

ULIPs have a lock-in period of five years, during which you cannot withdraw the funds. However, you can discontinue paying premiums if needed, but a discontinuance penalty will be levied. The remaining amount will be moved to a discontinuation fund.

ELSS has a shorter lock-in period of three years, during which you cannot withdraw your funds.

Investment Horizon: ULIP vs ELSS

While it is technically possible to withdraw funds from both ULIPs and ELSS after the respective lock-in periods, it is advisable to stay invested for longer durations to maximise returns.

The ideal investment horizon for ULIPs is around 10-15 years, allowing ample time for wealth accumulation and potential compounding.

For ELSS schemes, an investment period of 7-10 years is recommended to benefit from market fluctuations and potentially higher returns.

Fund Switching Flexibility: ULIP vs ELSS

ULIPs provide investors with the flexibility to switch their investments among different fund types such as debt, equity, or hybrid funds based on their changing investment goals and risk tolerance. This allows investors to adapt their portfolios to suit their evolving financial needs. However, there may be a limit on the number of free switches allowed per year, beyond which a switching fee will be charged.

On the other hand, ELSS schemes do not offer the option to switch funds. The investment remains fixed for the entire tenure. ELSS plans often provide a dividend option where investors receive regular payouts.

Pros and Cons: ULIPs and ELSS

ULIPs have several advantages, including tax benefits on premiums and returns, flexibility in fund switching, and the ability to continue generating returns even if premium payments are discontinued. The ULIP tax benefit make it an attractive investment option. However, they require a long-term commitment of around 10-15 years and involve various charges.

ELSS schemes offer the potential for high yields (around 12-15% per annum), have the shortest lock-in period among tax-saving instruments under Section 80C, and provide tax-free returns up to Rs. 1 lakh. However, returns are market-linked and not guaranteed.


In conclusion, ULIPs and ELSS serve different investment purposes. If you are primarily looking for life coverage along with wealth generation, ULIPs can be considered as they offer insurance coverage alongside investment opportunities. On the other hand, if your primary goal is tax-saving through market-linked investments with potentially higher returns, ELSS can be a suitable option.

Remember to carefully evaluate your investment goals, risk profile, and time horizon before making a decision. Both ULIPs and ELSS have their own advantages and limitations; choose the option that aligns with your financial objectives.

As you plan your financial future, consider consulting with a certified financial planner or advisor who can provide personalised guidance based on your specific needs.

Michael K

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