The most difficult debate in the mind starts when an individual must choose the right tax-saving instrument. There are various tax-saving instruments available u/s 80C of the Income Tax Act of which ELSS being the only instrument to invest maximum funds in equity giving higher returns as compared to other available instruments. Other well-known tax saving instrument that invests in equity is ULIP. Let’s discuss two most commonly known and confused tax-saving instruments: ELSS and ULIP.
ELSS (Equity Linked Saving Scheme) is an open-ended scheme which invests purely in equity and equity related products and comes with a lock-in period of 3 years. It also provides tax-deduction of up to Rs 1,50,000 for a financial year u/s 80C of the Income Tax Act. An investor can claim tax-deduction only for the financial year in which he/she has made the investment in ELSS. An investor can invest in ELSS through the <a href=“https://www.sbimf.com/en-us/sip” title=“Start Investing in Systematic Investment Plan Today!”>SIP</a> (Systematic Investment Plan) route or lumpsum.
On the other hand, ULIP (Unit Linked Insurance Plan) is a combination of insurance and investment. It invests a portion of the premium in stock, debt or mutual funds with a lock-in period of 5 years and a part of it is taken as insurance cover. It also provides a tax-deduction of up to Rs 1,50,000 u/s 80C of the Income Tax Act.
When it comes to choosing the right tax saving instrument, you should start early to earn tax-benefit along with wealth creation. This is where <a href=“https://www.sbimf.com/en-us/equity-schemes/sbi-magnum-taxgain-scheme” title=“Start Investing in Systematic Investment Plan Today!”> ELSS fund</a> has an advantage over ULIPs as the entire investment goes into equities. Whereas, ULIP invests only a portion of the premium in equities.
Charges applicable on ULIP are premium allocation charges, policy administration, fund management and the mortality charges which is higher when compared to ELSS, as the charges on ELSS is only fund management charges. Thus, ELSS is also is lower in cost, more transparent and has lesser lock-in period compared to ULIPs making it a better tax saving instrument with dual benefit of tax saving and wealth creation.