ELSS vs ULIP : Which is Better?
November 20193 min read
In Union Budget 2018, the previous finance minister Arun Jaitley introduced long term capital gain on gains from equity mutual funds. Due to this, there was an argument made about how ULIP (Unit Linked Insurance Plans) is better than ELSS (Equity Linked Savings Schemes) for tax saving purposes. The underlying logic for this is, ELSS will incur the long term capital gain implication but for ULIPs it is not applicable.
So, what is the tax benefit for ULIPs?
Under Section 80C, you can invest up to 1,50,000 to reduce your tax outgo. Investment in ULIP and ELSS both are eligible for this benefit. But the rule of long term capital gain is only applicable for ELSS. i.e. after the lock-in period of 3 years, if you redeem your investments, then you will have to pay a tax of 10% over profit more than 1,00,000. However, maturity proceedings from ULIP are tax-exempt under section 10 (10 D). And this gives ULIP an edge over ELSS.
- Policy Administration Charge – These are deducted on a monthly basis.
- Premium Allocation Charge – These charges are deducted upfront from your premium.
- Mortality charge – Mortality expenses are charged towards providing you a Life Cover. These expenses vary with age and are deducted on a monthly basis.
- Fund Management Charge – Usually for an equity fund, the fund management charge is applied at 1.35%.
- Premium Discontinuance Charge – As mentioned earlier, if you decide to stop paying the premium before the lock-in period of 5 years, a premium discontinuance charge will be deducted.
In addition to this, if you plan to surrender the policy midway, surrender charges will also be deducted. You will have to read your policy document carefully to understand the charges included in the ULIP. There are some new generation online ULIPs where they deduct only mortality charges and fund management charges.
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