Due to the new income tax regime, the Equity Linked Saving Schemes (ELSS) offered under mutual funds may lose its popularity in the market. This product was in high demand in the Indian market as it helped lower the taxes.
However, with the new law in place, individuals will not be able to claim certain exemptions and deductions by investing in tax savings investment vehicles. In fact, according to the Mutual Fund industry, people would opt for the new tax regime as it allows to gain higher post-tax income. This would simply mean that they will skip investing in products like ELSS.
In other words, people belonging to the lower end of the income spectrum would certainly want extra money in their hand and are bound to opt-out of the investment strategies.
For investment instruments such as ELSS, Unit Linked Insurance Plans (ULIPs), and PPF, you can save tax for up to INR 1.5 lakh under Section 80C of the Income Tax Act. Between ULIP vs ELSS, ELSS surely has been one of the topmost choices for people over the years due to its lower lock-in period.
The ELSS offers a lock-in period of three years, whereas ULIPs offer a lock-in period of five years. Moreover, the funds under the ELSS plan have been on a steady rise over the last three years. Thus, making the product all the more popular amongst the public. The asset under management (AUM) of ELSS was at INR 99,817 crore in December 2019 compared to INR 88,512 crore in the previous year.
But now that the appeal for the product may fade due to the new tax regime, people might want to consider other investment products to save tax. Young investors can opt for ULIPs as it offers dual benefits of investment and insurance.
Here, a part of the premiums paid is used for life insurance coverage, while the remaining is invested in funds of your choice. You get the liberty to invest in equity funds, debt funds, or a combination of the two. At any point during the policy tenure, you can switch from equity to debt and vice versa, all depending on the market fluctuations.
To briefly compare ULIP vs ELSS, consider the following table.
|The lock-in period for ULIPs is five years
|ELSS comes with a lock-in of three years
|ULIP returns are variable as it depends on the funds’ market performance
|Since ELSS are market-linked, the returns are dependent on the scheme. However, you can expect approx. return on investment between 12-14%
|The premiums paid are eligible for tax deduction under Section 80C of the Income Tax Act
|LTCG under ELSS is taxed at 10% over and above INR 1 lakh
|Charges such as policy administration charges, premium allocation charges, mortality charges, etc. are applicable
|Exit load and fund management charges are specified in the SID
|You can make partial withdrawals only after the lock-in period of five years is completed
|Similar to ULIPs, funds are available after the lock-in period of three years is completed
Understanding which investment vehicle is appropriate for you is the first step towards building a robust financial management plan. Hence, evaluate the available products and then choose the one that allows you to accomplish your financial goals in time.