ULIP vs ELSS: Which is Better?

When you are looking for a tax-saving investment in India, there are two popular options which are (ULIP) Unit Linked Insurance Plans and (ELSS) Equity Linked Saving Schemes. So both help you to save on taxes which is under section 80C of the Income Tax Act, but they work differently and they are suited for different types of investors. So here we will discuss ULIP vs ELSS.

Your choice between ULIP and ELSS should depend on your financial goals, how much risk you are willing to take, and how long you want to invest, so let’s discuss which one is right for you.

What is ULIP

ULIP stands for Unit Linked Insurance Plans which is a hybrid product that combines investment and insurance, as a portion of your premium goes towards the life insurance coverage. So the remaining amount is invested in the market which is linked to funds like debt, equity, or a mix of both. So here are some key features of Unit Linked Insurance Plans.

• Flexible Fund Choices: Here you can switch between equity and debt funds which are based on the market conditions. 
• Dual Benefits: Life insurance + investment is a dual benefit.
• Lock-in Period: Minimum of 5 years lock-in period.
• Tax Benefits: Here the premiums paid for the ULIP qualify for tax deductions under section 80C which is up to INR 1.5 Lakh per year, so the maturity amount is tax-free which is under section 10(10D), subject to certain conditions.
• Long-term Focus:  this is more suited for long-term financial goals, such as child education or planning for retirement.

What is ELSS?

ELSS stands for Equity Linked Saving Schemes is a mutual fund that invests in equity and equity-related instruments. This fund comes with a lock-in period of 3 years which makes it the shortest tax-saving investment option. This is under section 80C. So here are some key features of ELSS.

• Equity Exposure: this fund invests predominantly in equities as they offer high return potential but come with higher risks.
• Tax Benefits: Here the investments qualify for the tax deduction which is under section 80C, so in return, these are subject to long-term capital gain (LTCG) tax.
• Pure Investment: This is strictly an investment product with no coverage of insurance.
• Lock-in Period: This has a mandatory lock-in period of 3 years so after that you can redeem your unit.

Difference between ULIP vs ELSS

Here is the difference between ULIP vs ELSS:

Parameter	ELSS	ULIP
Lock-in Period	3 years	5 years
Tax Benefit (Section 80C)	Up to ₹1.5 lakh	Up to ₹1.5 lakh
Tax on Maturity	LTCG tax of 10% on gains above ₹1 lakh	Tax-free under Section 10(10D)
Ideal for	Investors focusing on wealth creation	Investors looking for insurance + investment
Risk Factor	High (Invests primarily in equities)	Moderate to High (Depends on fund allocation)
Cost	Lower expense ratio compared to ULIPs	Higher due to insurance component and charges
Liquidity	More liquid with a shorter lock-in period	Limited liquidity during the lock-in period
Nature of Product	Pure Investment (Equity Mutual Fund)	Insurance + Investment
Switching Options	No switching between funds	Can switch between equity and debt funds

Pros and Cons of ULIP

Here are the pros and cons of ULIP (Unit Linked Insurance Plans):

Pros

• This is flexible because here you can switch between debt and equity funds to adjust your portfolio as per the market conditions.
• This is a long-term wealth creation that is suitable for long-term financial goals with disciplined savings.
• Here both premiums and maturity benefits are eligible for the tax exemption, and subject to conditions.
• They offer both life insurance and investment in one product.

Cons

• This is a longer lock-in period which is 5 years which is longer as compared to ELSS (Equity Linked Saving Schemes)
• This is a little bit complex as the combination of insurance and investment can make it difficult to evaluate the product performance.

Pros and Cons of ELSS

Here are the pros and cons of ELSS (Equity Linked Saving Schemes):

Pros

• It is the shortest lock-in as among all the section 80C options, Equity Linked Saving Schemes has the shortest lock-in period of 3 years.
• It is easy to understand since it’s purely an investment vehicle without insurance.
• They have higher returns than a pure equity fund Equity Linked Saving Schemes have the potential to offer higher returns in the long run.
• Equity Linked Saving Schemes have a lower expense ratio compared to Unit Linked Insurance Plans

Cons

• Equity Linked Saving Schemes do not offer any return subject to market volatility.
• Equity Linked Saving Schemes does not offer any life insurance coverage.

Also, Check - What is Direct and Indirect Tax?

Which one should you choose between them: ULIP or ELSS

Well, it’s all about your preference of which one should you have to choose between them,

• Choose ULIP if you want the dual benefit of life insurance and investment in a single product, which is looking for flexibility in fund allocation and also has long-term financial goals.
• Choose ELSS if you are focused on pure wealth creation and also prefer a shorter lock-in period which is 3 years, and here you are willing to take on higher risk for higher returns.

Wrapping Up

Here, both ULIP and ELSS are for different purposes, ULIP is more suited for the investor looking for an all-in-one solution with insurance and also with investment benefits. 

On the other hand, ELSS is for those investors who want to seek high returns and also for tax savings with a focus on wealth creation.  You can choose your preferred investment option that aligns with your goal and also provides you with an optimal return.