ULIP VS ELSS: Which is better?

With a cut in their cost structure and a more favorable tax treatment, ULIPs seem to have got an edge over ELSS. Is this really the case?

- Aakar Rastogi and Shruti Agarwal

Investors often want to compare equity-linked savings schemes or tax-saving funds with unit-linked insurance plans as they both invest in equity and come under the same 80C umbrella. Our readers know that we discourage investing in ULIPs and prefer ELSS. For insurance, we prefer term insurance, which gets you a large cover at a low cost.

Yet the sales pitch for ULIPs continues to tantalize investors. You pay a single premium and get the benefits of both life insurance and equity investments. At the time of maturity, the insured gets the investment value back, unlike term insurance plans where no benefit is given if the insured survives the policy tenure. Given this, ULIPs seem to provide a win-win situation to the insured. After all, something is better than nothing, right? Well, not always.

Although ULIPs have been in existence for a long time, the product has undergone massive changes only over the last few years. Earlier, the biggest hindrance to investing in a ULIP was its exorbitant charges but they have now come down. Hence, we are now receiving many queries from our readers on whether ULIPs have now become a better tax-saving alternative than equity-linked saving schemes (ELSS), given that the former enjoys a more favorable tax treatment. So, in order to find out a better option between ULIPs and ELSS, here is a comparative analysis of the two based on the costs involved and their tax treatment. Although the return is an important parameter that an investor would like to consider, we will discuss it later. For now, we assume that both the options deliver the same returns.

Which is costlier?