There is no doubt that with all the talk and heavy marketing around mutual funds, it is easy to get carried away and begin investing in mutual fund products like Equity-Linked Savings Scheme (ELSS), which is well-known as a tax-saving product.
However, there is a superior wealth-making instrument in the market that saves you more tax than mutual funds and even gives you life cover, namely Unit Linked Insurance Plans (ULIPs). ULIPs give you far more benefits than mutual funds (including ELSS) and have fewer hidden costs.
Based on facts, let us understand how ULIPs prove to be a better investment option than ELSS.
Long-Term Capital Gains (LTCG) Tax
The Long-Term Capital Gains (LTCG) Tax is a tax that the government has recently started levying on long-term investments. As we know, investors now have to pay 10% LTCG tax on gains exceeding Rs 1 lakh on the sale of equity instruments such as mutual funds and shares held for more than one year. Since the very point of mutual fund investments is creating a huge corpus of money, you cannot escape this tax.
Also, when the customer chooses to move his funds between debt and equity instruments, it attracts capital gains tax. These could be short-term or long-term taxes. Earlier, ELSS used to offer tax-free returns, but after the re-introduction of LTCG tax in the 2018 Budget, this is no longer the case.
On the other hand, ULIPs do not come with the burden of capital gains tax, whether the investment is short term or long. Moreover, there are no charges when you move funds between debt and equity instruments for a set number of times, unlike ELSS.
Gains made in ULIPs are completely tax-free.
Tax Benefits on Investments
Under ELSS, you can avail tax deductions only under Section 80(C). Whereas, under ULIPs, you have the option to avail tax deductions under 80(C) or 80(CCC) and claim a maximum tax deduction of up to Rs 1.5 lakhs in a financial year.
As mentioned earlier, gains made in ULIPs are completely tax-free.
Same Returns as Mutual Funds
Since ULIPs and ELSS (mutual funds) operate in the same markets and give the customer the choice of instruments, risk exposure, and so on, they are exposed to the exact same risks and make similar gains.
Financial instruments from which withdrawals are easy to make or do not attract penalties tend to be broken before the intended term; for example, mutual funds.
ULIPs, due to their forced investment nature, are always goal oriented; for example, you start a ULIP for your child’s education or marriage. Stopping a ULIP attracts heavy penalties and there is even the first 5 years' lock-in period. This type of forced investing under ULIPs ensures you do not take your eyes away from the greater good and keeps you on track. Moreover, one invests in ELSS funds for general-purpose tax-savings and not to meet established financial goals.
Fund Management Charges
ELSS funds levy fund management charges up to 2.25%, whereas ULIPs cannot charge more than 1.35% as fund management charges.
Being an insurance product, in the event of the policyholder’s untimely demise, ULIPs provide life cover to the beneficiary. Naturally, ELSS does not offer any such cover.
ULIPs have both insurance and investment components; that is, you can benefit from market-linked returns and also have life cover, which will protect your family ably in your absence. Moreover, the advantages of ULIPs over ELSS as a tax-saving investment option is beyond question too.