In order to maximize your potential investment returns, it always makes sound financial sense to take advantage of any tax incentives that are available and to invest your money in the most tax-efficient way.
A ULIP saving plan (Unit Linked Insurance Plan) qualifies for tax deductions under section 80C of the Income Tax Act and the same applies to an ELSS (Equity Linked Savings Scheme).
Whether you choose to invest via a ULIP or ELLS, both offer tax benefits, so how do they differ and what comparisons can be made about either option?
Claiming a Tax Deduction
Both ELLS and ULIP have the same threshold when it comes to the level of tax deduction that you can claim in each financial year.
You will be able to make a tax deduction of up to INR 150,000 whether you are investing in an ELLS or ULIP, so from a tax treatment perspective, the two schemes offer the same benefits when it comes to claiming a tax deduction.
Although the tax treatment of both schemes is in line with each other there are fundamental differences to understand about ELLS and ULIP.
ELLS can be described as a diversified equity mutual fund and the scheme will normally feature companies with differing market capitalizations. Also, you need to be prepared to leave your money in the scheme for a minimum of three years, which is the mandatory lock-in period.
Another point to consider about ELSS is that your money will be primarily invested in stocks and that means you should ideally take a longer-term view than three years to reduce the prospect of volatility, as share price movements tend to be more stable when viewed over a decent period of time.
Learn about ULIPs
When you invest in a ULIP you will be covering two bases with your choice as it combines life insurance protection with investment.
Each payment you make will go toward meeting your insurance cover costs, especially in the early years, with a shift in emphasis toward the investment part of the plan as time goes by.
The combination of insurance and investment is a key feature of a ULIP and that aspect is what sets it apart from other investment options.
As you might expect when you consider the life insurance element of ULIP, the lock-in period is longer than ELLS and the mandatory period is 5 years.
As any investor should know, returns are rarely guaranteed and the amount of gains you make in ether an ELLS or ULIP can vary greatly for a number of viable reasons.
With a ULIP you have a variety of investment options that will influence what returns you make. ELLS is market-linked and that also means that you should expect a certain amount of volatility and returns will also be dependent on which scheme you choose.
A good way of deciding which scheme is right for you would be to seek out some professional guidance to help you pick the option that best suits your goals, especially as both offer powerful tax savings options.