ELSS vs ULIP: Preferred Tax Saving Option

ELSS Vs ULIP: What Should be your Preferred Tax Saving Option?

Compare ELSS and ULIP to pick the best tax-saving option based on your goals and risk appetite.

Written by : Knowledge Centre Team

2025-12-25

8333 Views

17 minutes read

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Planning for your future often involves a mix of life goals like buying a house, getting married, ensuring a great future for your child and visiting a new country. These are the "life goals" or milestones you strive to achieve.

While these goals require focused financial planning, one smart way to make the most of your money is to invest in tax-saving instruments that help you reduce your liability while growing your wealth. Tax-saving investments are not a life goal, but they can help you reduce taxes, which can help you save more for your goals.

These are the investments that are eligible for deductions u/s 80C of the Income Tax Act 1961. ULIPs and Equity-Linked Saving Schemes (ELSS) are some of the most popular tax-saving options available in the market. But which one should you choose?

Let’s break it down to help you decide.

Key Takeaways

  • ELSS funds primarily invest in equities and are eligible for tax deduction up to ₹1.5 lakh under Section 80C.

  • ULIPs serve dual purposes, offering life cover and market-linked investment. 

  • If you’re planning to buy a car, take an overseas vacation, or make a mid-term purchase, ELSS works well due to its 3-year lock-in and high-growth potential.

  • ULIPs come with a minimum 5-year lock-in and are better suited for long-term commitments like your child’s higher education, buying a house, or retirement.

  • ULIPs offer greater control over fund allocation. You can choose between equity, debt, or hybrid funds and switch between them based on market performance.

What is ELSS?

An Equity Linked Saving Scheme, or simply ELSS, is a type of mutual fund that invests a major proportion of the funds in equity and related schemes. ELSS has at least 80% of the fund invested in equity-related securities, while some of the contributions are in fixed investments.

This is the only type of mutual fund that is eligible for deductions u/s 80C. ELSS has a short lock-in period of just 3 years. Since the equity contribution is very high, it is a more risky investment, but at the same time it has the potential to earn you great returns and help fulfil your goals.

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When to Choose ELSS?

You can invest in ELSS if your risk appetite is high enough, i.e., you can tolerate an investment with high volatility and have a goal that has a timeline of 3 or more years. Thus, you can look to achieve your medium-term goal with your ELSS.

These can be the following:

  1. Buying a car
  2. Purchasing a ring for your wife
  3. Planning an overseas trip

The longer you hold your ELSS scheme, the better are the chances of you getting higher returns.

What is ULIP?

A Unit Linked Insurance Plan is a life insurance variant that also offers you an opportunity to invest in the market. With ULIP plans, you get both insurance and investment in a single product.  It offers tax benefits under Section 80C for premium payments and Section 10(10D) for maturity/death benefits on fulfilment of certain conditions.

ULIPs have a lock-in period of 5 years. During this period you cannot make any withdrawals, and if you do, you will lose a lot of money. 

When to Choose ULIP?

The ULIP plan is perfect to cater to your long-term goals, which have a timeline of at least 5-10 years or more. The longer you stay in ULIP, the more time you will allow your investments to grow and help you create a good corpus.

ULIP plans can help you achieve the following goals:-

  1. Buying a home
  2. Having a successful life post-retirement
  3. Ensuring a good education for your child
  4. Leaving a legacy for your children/grandchildren

ELSS vs ULIP: Understanding the Difference

We have now seen that both these investment options have some similarities. These can both help you save taxes and are linked with the market. But despite these points, they also have a lot of differences.

Let us look at the difference between ELSS and ULIP with the help of a table:

Features

ELSS

ULIP

Investment Portfolio

An ELSS fund has a minimum of 65% of equity stocks.

Generally, ELSS funds have 80-85% of equity,

In a ULIP, you are given full freedom to decide how much of your money will be invested and in which fund. Thus, you can choose to invest in the following equity and debt as per your preference:

  • Equity Funds
  • Debt Funds
  • Hybrid

Lock-In Period

ELSS have a lockin period of 3 years

ULIP plans have a lockin period of 5 years

Tax savings

ELSS is eligible for deduction of up to ₹1.5 lakhs u/s 80C

Tax deductions of up to ₹1.5 lakhs u/s 80C available. Tax-exemption also available on maturity/death amount u/s 10(10)D

Tax on Maturity/ Withdrawals

LTCG tax @ 10% if the gains exceed ₹1 lakh.

Returns can be taxable if the premium you pay exceeds ₹ 2.5 lakhs per year.

Charges

ELSS funds involve charges such as exit-load, management charges.

ULIPs involve charges such as:
  • Policy administration charge
  • Fund management charge
  • Premium allocation charges
  • Mortality charges, etc.

Expense Ratio

It has a low expense ratio in the range of 0.5% to 1.5%

Charges are capped at 1.35%

Life Cover

No life cover is present

Life cover is provided in ULIPs. The death benefit is payable to the family at the time of your death

Bonuses

Not present

Bonuses present in certain policies such as:
  • Loyalty Additions
  • Wealth boosters

Flexibility in Investment

You can either invest in a lump sum or through SIP

Freedom to choose your mode of premium payment and the duration

Withdrawals

After 3 years

After 5 years

Switching

Not allowed

Fund switching is allowed

Choosing Based on Your Financial Goals

Choose ELSS if you:

  • Are looking for a high-return, market-linked tax-saving investment

  • Have short- to medium-term financial goals

  • Want the shortest lock-in among 80C instruments

Choose ULIP if you:

  • Want investment + insurance in one product

  • Are building a long-term retirement or child education corpus

  • Seek tax-free maturity proceeds with flexible fund management

Final Thoughts

Both ULIPs and ELSS have their sets of advantages and shortcomings. They can help you at different times. This is a great option if you are willing to take risks and want to save taxes. ELSS are more transparent and involve fewer expenses. Thus ELSS can be considered if you want an out-an-out investment option that can help in achieving shortly to medium-term objectives

ULIPs on the other hand offer tax-benefit, both in premium payment as well as maturity/death benefit. It includes a life cover that ensures your family remains financially protected even after you are not with them.

When choosing a long-term financial product like a ULIP, the reliability and track record of the insurance provider matter just as much as the product itself. Canara HSBC Life Insurance is one such trusted name that offers numerous life insurance, savings and investment plans. Our ULIP plans with features like multiple fund options, flexible premium payments, partial withdrawals, and transparent charges, empowers policyholders to grow their wealth while enjoying life cover and tax benefits. 

So, whether you opt for ELSS, ULIP, or a strategic mix of both, the secret lies in starting early, investing consistently, and aligning your choices with your life goals.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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