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ULIP Vs ELSS Vs PPF: Which Tax Saving Investment Suits You the Most

The purpose behind any kind of investment is to create wealth through asset appreciation or to generate income. This is precisely the reason why most investors assess their risk-taking ability and invest a chunk of their present income in diverse asset classes. The name of the game is to wait patiently for future returns. However, there are certain investment instruments that can offer immediate returns – not as profits but as tax savings.

Three of the most popular tax-saving instruments in the market are Unit Linked Insurance Plans (ULIP), Equity Linked Saving Schemes (ELSS), and Public Provident Fund (PPF). If you have been investing for a while, the chances are that you have come across one or all three of these. But, if you are just starting out and don’t know which tax-saving investment suits you the most, then this article is for you.

Let’s begin by understanding each instrument before comparing them and determining their suitability.

Understanding ULIPs

A ULIP is an insurance policy that gives you the benefit of insurance cover along with investment in the stock market. ULIP meaning is evident from the name itself, wherein the ‘Unit Linked’ part indicates investment of part of your premium amount in equity, debt, or hybrid funds. The ‘Insurance Plan’ part indicates the part of your premium that is reserved to give life cover. As per the old budget, despite the division, the entire premium amount was eligible for tax deductions under Section 80C. But as per the new budget, high premium ULIPs are treated as equity fund investments, even though part of the premium is invested in debt based instruments.

Understanding ELSS

ELSS, as the name suggests, are tax-saving mutual funds that invest in capital markets with an in-built lock-in period of 3 years. These are close-ended saving schemes designed to offer investors tax-benefit by investing in a diverse mix of securities and company stocks.

Understanding PPF

PPF is a long-term saving instrument that is developed with the intent of promoting small and retirement-focused savings by the government of India. Since the PPF is managed by the government, the returns, tax benefits, and terms during the lock-in period of 15 years are subject to the government’s decision. Any Indian citizen can open a PPF account with no age restrictions.

How to Know Which is Better?

Now to figure out which of these three instruments are best suited for tax savings, you need to compare them according to the following criteria:

Tax Benefits Tax deductions up to Rs. 1.5 lakh in one FY under Section 80C. Till the last budget, the returns on maturity received tax exemption under Section 10(10D). According to the new budget, however, this exemption is only applicable if the annual premium of a ULIP plan is less than Rs 2.5 lakh, beyond which it shall be considered as a capital gain under Section 112A. Tax deductions up to Rs 1.5 lakh in one FY under Section 80C.

Maturity returns are taxable at 10% without indexation benefit if the total returns exceed Rs 1 lakh in a given FY.

Tax deductions up to Rs 1.5 lakh in one FY under Section 80C.

Maturity returns and the corpus are tax-exempt under EEE.

Risk Moderately high due to part of the premium being invested in capital markets. You can calculate your premium using a ULIP calculator. High, as a majority of the capital invested is engaged in equity-linked products for maximal returns. Low, as the returns are managed and regulated by the government.
Rate of Return The rate of return is variable, depending on the mix of equity, debt, or hybrid funds chosen and ranges around 16%. A ULIP calculator can be used to estimate returns and modify investment portfolios to maximise returns. Returns are variable as 65%, or more of the invested capital gets allocated to equity. On average, returns can be expected in the range of 12-14% over the long term. The rate of return is determined by the government and is currently fixed at 7.9%.
Minimum Investment Can change as per the coverage and product selected Rs 500 Rs 500 in every FY
Lock-in Period 5 years 3 years 15 years (can be extended for a duration of 5 years, upon completion)

Final Thoughts

Finally, ask yourself why you are trying to invest in a tax-saving instrument. If your key objective is to save tax now and not block your money for long, then ELSS is a good option for you. If you want to achieve relatively assured, risk-free returns over the long term, then PPF can suit you best. And, if you want to save tax now, build wealth for your retirement while enjoying a life-cover, then investing in ULIPs is the best approach for you.

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