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ULIP, ELSS, and PPF - Know the Difference

Before you can determine which investment avenue suits you the best, set your investment goals first

Friday August 28, 2020 8:42 AM, ummid.com News Network

Investment Tips

If you wish to invest your hard-earned money into lucrative instruments, you will come across many options in India. Before you can determine which investment avenue suits you the best, set your investment goals first. It is important to understand that no scheme offers quick ways to earn high returns without any risk. Hence, it would help if you consider options that suit your risk appetite and financial goals.

Here, we discuss three investment choices with tax-saving properties. Once you understand them better, it will be easier to select the most suitable one.

1. Unit-Linked Insurance Plan (ULIP)

To understand what is ULIP plan, you first need to learn what life insurance policies are. A life policy is an insurance cover that offers financial aid to the nominees in case of an unfortunate event resulting in the policyholder's absence. A ULIP is a type of life insurance policy that provides the added advantage of investing.

You can obtain the policy in exchange for paying a regular premium as ULIP charges. ULIP is a long-term investment option that grows your money over time to create a substantial fund. A great feature of ULIPs is its switching option. During the tenure, you can change the investment fund from equity to debt or vice-versa. This benefit allows you to alter the investment option as per your changing financial targets and risk-taking ability.

ULIPs also offer multiple tax benefits. Section 80C of the Income Tax Act, 1961 allows you to claim an annual tax deduction of up to INR 1.5 lakh on the premium paid. Additionally, ULIP’s maturity benefit is tax-free under Section 10(10D) of the same Act.

ULIP returns depend primarily on the combination of investment funds under your plan. Equity funds offer greater returns, and they come with a high risk. On the other hand, debt funds have a lower risk and offer assured moderate returns.

2. Equity-Linked Savings Scheme (ELSS)

ELSS is a perfect investment alternative for people who want to enjoy the benefits of mutual funds while availing of a tax deduction. In ELSS, up to 65% of your investment is put into equities of different companies with varied market capitalizations. ELSS has a three-year mandatory lock-in period, and the income generated from this scheme depends entirely on the stock market’s performance. However, past performances suggest that it is possible to earn up to 14% return from an ELSS investment.

As an added advantage, ELSS offers tax benefits. Section 80C of the Income Tax Act, 1961 allows a yearly tax deduction of up to INR 1.5 lakh on the amount invested in ELSS. However, the money earned from this investment instrument is taxable under Long-Term Capital Gains (LTCG) and Dividend Distribution Tax (DDT).

3. Public Provident Fund (PPF)

If you do not have any reservations in choosing an investment option, which has a 15-year lock-in period, PPF can be an ideal investment avenue. PPF offers decent returns. Moreover, it is a safe investment option, as it has government backing along with the additional benefit of tax-savings. The rate of return from a PPF varies depending on different factors; the current interest rate is 7.10%. Even though there is a lock-in period in place, you can withdraw a portion of the fund after seven years. Also, you can opt for a loan against the PPF after this duration.

The biggest advantage of a PPF is the tax benefit that it offers. Under Section 80C of the Income Tax Act, 1961, the deposit made towards the PPF account is exempt from tax. Additionally, the maturity benefits are tax-free.

When choosing an investment option to grow your money into a fortune, you should compare the ELSS, PPF, and ULIP returns to determine which instrument is more aligned with your financial goals.

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