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ELSS vs ULIP – What should be your preferred income tax saving option?

ELSS (Equity-Linked Savings Scheme) and ULIP (Unit Linked Insurance Plan) are two of the most popular tax-saving investment options in India. 

While ELSS is a type of mutual fund that aims to generate higher returns through equity exposure, ULIP is an insurance plan that offers the dual benefit of life insurance and investment. ULIP also provides policyholders with the option to choose between equity, debt, and balanced funds. 

If you’re in the process of building a financial portfolio, both ELSS and ULIP deserve a spot. But what if you only want to choose one? Between ELSS and ULIP, what is the best tax-saving option? Take a look.

Tax Treatment of ELSS 

ELSS is the only type of mutual fund scheme eligible for a tax deduction. Under Section 80C, ELSS investments of up to Rs. 1,50,000 in a year are eligible for deductions in a financial year. While investors can also invest more than Rs. 1,50,000 in an ELSS fund, the excess amount will not qualify for tax deductions. 

ELSS funds have a lock-in period of 3 years. So, the invested amount can only be withdrawn after 3 years from the date of investment. LTCG (Long-Term Capital Gains) tax @10% without indexation benefit is applicable on the returns generated from ELSS. 

Tax Treatment of ULIP

Under Section 80C of the IT Act, annual premiums of up to Rs. 1.5 lakh paid towards a ULIP are eligible for deductions. The maturity amount is tax-free, and even the gains are exempted under Section 10(10D). ULIPs come with a lock-in period of 5 years, and the claimed tax benefits will be reversed in the case of premature withdrawal.  

Also, according to the new tax proposal in Budget 2021, if the ULIP policy was purchased after 01/02/2021 and the annual premium is above Rs. 2.5 lakh, the returns from such policies will be treated as capital gains and taxed accordingly under Section 112A. This means that LTCG @10% will be applicable if the capital gains are in excess of Rs. 1 lakh. 

ELSS vs ULIP- The Best Tax Saving Option?

Both ELSS and ULIP offer excellent tax benefits. While tax saving is indeed very critical, there are other factors that an investor should consider when selecting between the two. 

For instance, ELSS is a pure investment product. By investing your money in the equity market, it aims to deliver handsome returns in the longer run. However, not every investor might be comfortable with the high level of risk in equity. 

ULIP, on the other hand, is a combination of life insurance and investment. Investors have the flexibility to choose between equity, debt, and balanced funds as per their risk appetite. The life cover included in the plan is also an excellent way to safeguard the financial future of your loved ones. 

Building a Tax-Efficient Investment Portfolio

Tax saving is one of the several benefits that ELSS and ULIP offer. While both are highly tax-efficient investment options, one should focus on their long-term goals and risk appetite to make the right decision. 

If you’re looking for an aggressive long-term investment option, ELSS can be an excellent choice. But if you are looking for an investment product that helps you generate handsome returns in the long run and at the same time secure the financial future of your family, ULIP is the way to go. If you’re still not able to make a decision, it’d be wise to consult a financial expert.    

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