ULIP, PPF, or ELSS- Which Tax-Saving Instrument Is Right For You? 

Investing in tax-saving instruments under Section 80C is tricky, as multiple seemingly compelling options exist. In this case, three of the most popular investments include ULIP schemes, ELSS (equity-linked savings schemes), and PPF (Public Provident Fund). They all offer deductions on contributions/payments up to Rs. 1,50,000 under Section 80C. So which one is the best bet for your needs? Here’s a closer look at the same, with a brief overview of the three kinds of investments. 

ULIP Investments

A ULIP, meaning a unit-linked insurance plan, is a life insurance policy that combines both insurance and investments. The premium is invested into market-linked instruments and funds for earning returns after deducting applicable charges. You also get life insurance coverage with a sum assured payout to your nominees in case of your unfortunate death within the policy period. The funds can be chosen from a pool of equity, debt, liquid or hybrid funds. You can initially select the funds to invest in and later use the fund-switching facility to change your allocation depending on market conditions, life stages, evolving financial goals and risk tolerance. ULIPs usually have lock-in periods of 5 years. 

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PPF Investments

The Public Provident Fund is a guaranteed-return investment, with the rates fixed periodically by the Government. The maximum amount that can be invested in a year is Rs. 1,50,000. It is a long-term investment that helps you generate wealth through the power of compounding. PPF investments have lock-in periods of 15 years, with an option to extend the tenure after that. Partial withdrawals are allowed, subject to meeting specific conditions. The minimum investment amount is Rs. 500, and you should deposit money at least once every year to keep your account active. 

ELSS Investments

Equity Linked Savings Schemes offer tax savings up to Rs. 1.5 lakh under Section 80C, as mentioned above. They have 3-year lock-in periods, and investors can use SIPs (systematic investment plans) for their investments. They invest in equity instruments in the market. 

Now that you have a basic overview of these three investment types, which should you choose? Read on for more on this aspect. 

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Which investment option is worth choosing? 

At the outset, all three investments offer the same tax benefits outlined above. However, here are some other points worth noting in this regard. 

  • ELSS offers the shortest lock-in period, while ULIPs also have comparatively smaller lock-in periods of 5 years. PPF has the longest lock-in period of 15 years, which means the lowest liquidity out of the bunch. 
  • ULIPs and ELSS require the payment of certain charges subject to specific limits, while the PPF has the lowest one-time charge of Rs. 100
  • ULIPs stand out for their life insurance coverage, which ensures a lump sum payout to the policyholder’s nominee in case of an unfortunate demise within the policy period. PPF and ELSS provide no such risk or life coverage. 
  • The PPF also offers guaranteed and fixed returns which are totally tax-exempted. While there are no market risks, the returns may not always be enough to surpass inflation. 
  • ULIPs and ELSS often ensure far higher returns, although they are not guaranteed, and there is an element of market risk involved
  • Yet, ULIPs offer fund-switching facilities that can help maximize/minimize risks depending on the market conditions. They usually provide better returns over a longer duration. 
  • ELSS and ULIPs are subject to LTCG (long-term capital gains) taxes of 10% in case the proceeds surpass Rs. 1 lakh
  • However, the maturity benefit for ULIPs will be tax-free if the aggregate annual premium is up to Rs. 2.5 lakh. If it surpasses this amount, then the LTCG comes into play. STCG may apply at 15% for proceeds withholding periods lower than a year. 

Considering all these aspects, ULIPs can be a good bet, particularly for their life coverage which gives you an added layer of protection and their tax exemptions under Section 10 (10D), provided you can keep your aggregate annual premiums to less than Rs. 2.5 lakh. At the same time, you also get tax deductions on your premium payments like the other plans while choosing and switching your fund allocation to minimize risks and build a sizable corpus for the future. On the other hand, PPF, while offering lower charges, tax exemptions and deductions, may provide less than sizable returns to combat inflation. ELSS is riskier sometimes while not being as tax-efficient or offering life coverage. Finally, diversification is always a good idea, and depending on your future goals and risk appetite, you can spread your portfolio across ULIPs and other investments.