ULIP and ELSS: Understand the difference?

In India, tax-saving and wealth-building go hand in hand for many investors, particularly for those in the 25-45 age bracket who are keen on making the most of their hard-earned money. The need to optimise taxes while growing wealth efficiently has made certain investment options increasingly popular. Among them, ULIPs (Unit Linked Insurance Plans) and ELSS (Equity Linked Savings Schemes) stand out as two of available choices. Both serve as tools for saving taxes under Section 80C (under old tax regime only) of the Income Tax Act, yet they offer different features, benefits, and risks. So, the burning question remains: Which option effective for you — ULIP or ELSS?

Understanding ULIPs and ELSS

When it comes to tax-saving investments, ULIPs and ELSS offer distinct features that cater to different financial goals. Understanding the key characteristics of each can help you choose the right option based on your investment horizon, risk appetite, and need for insurance coverage. Let’s take a closer look at what ULIPs and ELSS are, and how they differ.

What is ULIP?

A Unit Linked Insurance Plan (ULIP) combines insurance with wealth- building opportunities. It allows you to invest in market-linked instruments such as equities, bonds, or debt, while also providing life insurance coverage. ULIPs are designed with a minimum lock-in period of five years, making them a long-term investment option. The returns are subject to market performance, and the value of your investment can fluctuate accordingly. Understanding the difference between ULIP and ELSS can help you decide if a ULIP is a good option for your financial goals.

What is ELSS?

An Equity Linked Savings Scheme (ELSS) is a type of mutual fund that primarily invests in equities to generate returns. ELSS qualifies for tax savings under Section 80C of the Income Tax Act (under the old tax regime only) and comes with a shorter 3-year lock-in period. While they offer the potential for higher returns (similar to a ULIP), the risk is also higher, as they are market-linked. ULIP and ELSS are distinguishedmainly by their investment focus, with ELSS being purely equity-oriented.

ULIP vs ELSS: Key Differences

When choosing between ULIPs and ELSS, understanding the core differences across various factors can help determine which one best aligns with your financial goals.

1. Risk and Returns

With ULIPs policyholders have the option to choose multiple funds with varying level of equity and debt proportion and balance the risk. As market-linked instruments, they provide the opportunity for higher returns but come with inherent risk.

ELSS, on the other hand, is an equity fund, meaning it has higher exposure to market fluctuations. However, this also presents a higher potential for long-term returns.

2. Liquidity

ULIPs have a 5-year lock-in period, which encourages long-term investment but limits liquidity in the short term.

ELSS offers greater liquidity with a 3-year lock-in period, making it a more accessible option for those looking for relatively quicker tax-saving benefits.

3. Tax Benefits

Both ULIPs and ELSS qualify for tax savings under Section 80C(under old tax regime only) of Income Tax Act, 1916. However, ULIP maturity benefits are tax-free under certain conditions. 

ELSS gains, however, are taxed at a rate of 12.50% for Long-Term Capital Gains (LTCG) after ₹1.25 lakh (as per Finance Act 2025), offering a more straightforward tax structure. 

4. Charges

ULIPs involve various charges such as allocation charges, mortality charges, and fund management fees that can eat into returns, however, there are new-age ULIPs, which only have mortality and fund management charges. ELSS only have fund management charges, but they are usually higher than the fund management charges of a ULIP fund.

5. Flexibility

ULIPs offer flexibility in terms of fund switching, allowing you to switch between available funds (equity, debt, or hybrid funds) based on market conditions or personal preferences.

ULIP or ELSS: What works for you?

Choosing between ULIP and ELSS largely depends on your financial goals, risk tolerance, and savings and investment plans. Here’s a quick guide to help you decide:

For Risk-Takers

If you have a high risk tolerance and are looking for potentially higher returns, ULIPs and ELSS both are good choice. As a equity-based investment, they have the potential to deliver superior returns, especially over the long term.

For Balanced Investors

If you prefer a balanced approach with both insurance and investment benefits, ULIPs would be the preferred option. They provide life insurance coverage while also allowing you to invest in equity or debt funds, and the flexibility to switch between them based on market performance.

For Tax-Focused Investors

Both ULIPs and ELSS offer tax-saving benefits under Section 80C (under old tax regime only), but the taxation on maturity differs. ELSS gains are subject to 12.50% Long Term Captial gain (LTCG) tax after ₹1.25 lakh (as per Finance Act 2025), while ULIP maturity proceeds are eligible for tax-benefits free under section 10(10D) subject to certain conditions if the aggregate annual premium is less than ₹2.5 lakh, making ULIPs potentially more tax-efficient for those in the higher premium range. 

Features of ULIPs

Wealth Building Combined with Life Insurance

ULIPs offer the dual benefit of life insurance and wealth-building, which makes them a suitable choice for those looking for both protection and investment growth.

Option to Switch Funds

One of the key advantages of ULIPs is the ability to switch between equity, debt, or hybrid funds depending on market conditions or your financial goals.

Tax Benefits

ULIPs allow tax deductions under Section 80C (under old tax regime only) for the premiums paid, and the maturity benefits are eligible for tax-benefit under section 10(10D), subject to certain conditions, provided the aggregate premium is below ₹2.5 lakh annually.

Additional Charges 

ULIPs come with various charges, such as allocation fees, mortality charges, and fund management fees, which can significantly impact your overall returns. However, new age ULIPs also give you the option to invest at very low charge structures as well.

Market Risk

Being market-linked, the returns on ULIPs can be volatile and are subject to market fluctuations, particularly if a large portion is invested in equities.

Lock-in Period

ULIPs have a 5-year lock-in period, which may not be suitable for investors seeking liquidity or a short-term investment.

Features of ELSS

Tax Benefits

ELSS provides tax-saving benefits under Section 80C (under old tax regime only)

Market-Linked Returns

Being equity-oriented, ELSS has the potential for higher returns, especially over the long term, making it a good choice for those seeking to grow their wealth through equity.

Market Risk

As ELSS is purely equity-based, it carries a higher level of market risk, meaning returns can fluctuate based on market conditions.

Lock-in Period

ELSS comes with a 3-year lock-in period, which, while shorter than ULIPs, but still restricts access to funds for that period.

Tax Implications on Returns

ELSS gains are subject to a 12.50% Long-Term Capital Gains (LTCG) tax after ₹1.25 lakh (as per Finance Act 2025), which could reduce overall returns for investors with substantial capital gains. 

Taxation of ULIPs and ELSS

ULIP Taxation (Post-2021 Amendment) 

Under the 2021 amendment, ULIP maturity proceeds are eligible for tax-benefits only if the annual aggregate premium across multiple ULIP policies does not exceed ₹2.5 lakh. If the premium is higher, the returns are taxed as capital gains, like equity investments. 

ELSS Taxation 

ELSS is subject to Long-Term Capital Gains (LTCG) tax at a rate of 12.50% on gains exceeding ₹1.25 lakh (as per Finance Act 2025), without the benefit of indexation. This applies once the 3-year lock-in period is over. 

Example: 

Let’s say you invest ₹1 lakh in both ULIP and ELSS and earn ₹50,000 in returns after 5 years. 

• ULIP (Premium ≤ ₹2.5 lakh): The ₹50,000 gain is eligible for tax-benefits
• ELSS: You’ll pay 12.50% tax on the ₹50,000 gain exceeding the ₹1.25 lakh threshold, so no tax in this example. However, if your gain exceeds ₹1.25 lakh, the tax would be ₹ 6,250. 

Frequently Asked Questions

1. How different are ULIPs and ELSS when it comes to wealth creation?

Both ULIPs and ELSS offer good potential for long-term wealth creation. ULIPs are more suitable if you seek a combination of life insurance and wealth creation, along with flexibility in fund switching. ELSS, being equity-based, generally offers higher returns but comes with market risk. The better option depends on your risk tolerance and financial goals.

2. What is the difference between ULIP and ELSS tax benefits?

Both ULIPs and ELSS offer tax-saving benefits under Section 80C (under old tax regime only). However, the tax treatment of returns differs: ULIP maturity proceeds are eligible for tax-benefits if the aggregate premium is ≤ ₹2.5 lakh annually, while ELSS gains are taxed at 12.50% LTCG after ₹1.25 lakh (as per Finance Act 2025). 

3. Can I invest in both ULIP and ELSS?

Yes, you can invest in both ULIPs and ELSS. In fact, investing in both allows you to diversify your portfolio—ULIPs for insurance and long-term growth, and ELSS for higher equity exposure.

4. Are ULIPs riskier than ELSS?

ULIPs carry market risk like ELSS, but with the added factor of insurance coverage. The risk depends on how your ULIP funds are allocated (equity vs debt). ELSS is purely equity-based.