ELSS or ULIP: Which is a better tax saving investment for 2020-21

Last Updated at: Jun 24, 2020
ELSS or ULIP Which is a better tax saving investment for 2019-20
A recent survey compiled by Morningstar India, Equity-oriented mutual fund schemes such as equity linked saving schemes (ELSS) generated returns of about 25% during the lockdown period. This is due to the recent liquidity infusion by RBI coupled with the government’s stimulus packages.


Equity Linked Savings Scheme (ELSS) or Unit Linked Insurance Plans (ULIP)- which one you would prefer to save up some money?

This is a common confusion that almost everyone who wants to invest in market-linked commodities has, and frankly, it is one that is difficult to figure out. Searching for the right answer to this puzzle requires a large amount of research and some in-depth knowledge in the field of finance and law.

That’s why we are here to help you by breaking both the commodities down so that you can choose which option works for you best.

Equity Linked Savings Scheme

Equity Linked Savings Scheme works like a mutual fund that allows you to invest in equity markets while enabling you to save taxes. Investment is tax-free as per Section 80C for up to 1.5 lakhs, and even the returns are tax-free up to 1 lakh, following which they are charged at a minimal 10% as per long-term capital gain rules.


  • Greater yield potential
  • 12-15% per annum returns, making it the highest concerning tax saving schemes
  • Lesser capital is required as an investment can be through Systematic Investment Plan (SIPs)
  • Less risky when it comes to volatile markets
  • Shortest lock period


  • Returns are not guaranteed
  • Suits investors who are willing to take moderate to high-level risks
  • Has to pick between growth or dividend option

Unit Linked Insurance Plans

A Unit Linked Insurance Plans is a broad term for products which are packaged, marketed and sold by insurance agencies. They provide not only investment opportunities but also serve as a coverage option and tax saving technique. Generally, the premium paid is used to invest in market shares while a part of it is kept as life coverage and so the investor gets the best of both worlds. They provide benefits while also being a good avenue to invest some money in when you need security.


  • Tax benefit
  • Returns are exempted from tax as per Section 10(10D).
  • More flexible
  • Provides more liberty and control to the investor
  • Serves as a long term commitment
  • Convenient
  • The risk decreases with the influx of premium


    • Several hidden charges such as allocation charges, administration charges and even management charges
    • Lesser returns due to expensive administration
    • Less scope for cost-benefit analysis
    • A long term plan that cannot be broken before five years

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Major Differences

Choosing one of either is difficult as both invest in equity and provide the investor with an option to avail tax benefits. But when we dig deeper, we find that the differences outweigh the similarities. Here’s a look at some of the significant differences between the two.

  1. ULIPs conceptually work as an insurance and investment product while an ELSS functions as a purely investment oriented enterprise or option.
  2. The main objective of a ULIP is to provide the customer with a plethora of benefits such as leverage, coverage and tax benefits while as far as an ELSS is concerned the main aim is to provide monetary benefits as a result of investing in a diverse market pool.
  3. The lock period of a ULIP runs up to 5 years while an ELSS may be withdrawn within three years.
  4. As far as tax benefits are concerned, investments that fall under ULIP is exempt from taxation as per Section 80C and Section 10(10D) if the coverage runs up to a value that is ten times greater than the premium. ELSS investments are non-taxable as per Section 80C of the Long Term Capital Gains rule.
  5. ULIPs are more flexible as they allow you to switch from equity, debt and balanced, and the charges associated with the switch vary from company to company. This sort of flexibility is not present in an ELSS which is more rigid due to its no switching policy.
  6. Charges for the ULIP may amount to 2.25% for ten years and 3% for shorter durations while an ELSS provides lower fees with most amounting to 2%.
  7. While the IRDA regulates the ULIP, the SEBI functions as the chief regulator for ELSS.
  8. The ULIP has the disadvantage of being less transparent as we less idea of where our money is being invested but when it comes to an ELSS, we can procure full details regarding the investment making the process more transparent.
  9. While a ULIP investment is a high-risk investment wherein returns are not entirely guaranteed, they do provide life coverage. In the same way, an ELSS is also a high-risk investment wherein the recovery we receive depends on the performance of the market and the skill of our manager.

A Comparative Analysis

While an ELSS serves short term investors who want high growth potential, a ULIP suits long-term investors who don’t want to see their returns materialise very fast. ELSS works best for young individuals who have money to spare.

ULIP provides the added advantage of giving you insurance coverage and hence is a safer, more secure option. But the returns suffer as a result of their more reliable way of functioning, leading to it is best suited for middle-aged or senior investors who don’t want quick or high-value returns.