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

ELSS is a very widely invested mutual funds scheme. ELSS funds, because the investment is exempted under section 80C, are considered as the best tax saving vehicle. The scheme invests in the capital markets and at the same time save taxes both on the investment and the returns generated. Investors can claim tax deductions of up to ‚Çπ150,000, by investing in ELSS but it also carries a mandatory lock-in period of three years. It might come off as a surprise but the three-year lock-in period is the shortest span for any tax-saving investment u/s 80C.

Although ELSS can give you great returns, the fact that your entire corpus here is invested in equities or equity-related products, the returns are highly volatile and mainly suitable for high-risk tolerant investors. (For someone not wanting to take the high-risk route, SIPs can be a better option.) Something to note in the case of ELSS investment is that after the announcement of Long-term capital gains (LTCG) tax in the Union Budget 2018, which became effective from April 1, 2018, redemption, profits above Rs 100,000 from ELSS funds will be taxed at 10%.

LIPs are provided by various insurance companies and they’re generally referred to as insurance-cum-investment products. This product gives the dual benefit of investment opportunity along with Insurance coverage. One part of the investment paid is used for ensuring the investor while the second part goes into funds for generating returns. Investors can choose to invest in equity, debt, hybrid, or money market funds through ULIPs. A tax deduction up to 1,50,000 can be claimed for ULIP investments, under section 80C of the Income Tax Act.

I prefer ELSS over ULIPs. I have separate plans for life insurances.