Why are ELSS funds still better than ULIPs despite new LTCG tax?

In the budget of 2018, LTCG (Long-Term Capital Gains) Tax was re-introduced on stocks, shares and share-oriented products. Ever since the LTCG tax was announced, Ulips (Unit-Linked Insurance Plans)  have come into the spotlight. This is because returns from ELSS became taxable after the budget passed where returns from Ulips continue to be tax-exempt.

Investments in both Ulips and Equity-Link Savings Schemes (ELSS) are eligible for Income Tax benefits under Section 80C. But under Section 10(10D), the short-term gains are tax-free in Ulips, while in ELSS Fund, it is taxed at 10%. And Insurance companies are busy highlighting that gains from equity funds are taxable and Ulips are tax-free.

So, here is the question, should you give into the noise and shun ELSS funds for Ulips? If not, here are some important facts about ELSS funds.

The LTCG Tax has made tax-saving options such as the Public Provident Fund (PPF) and Ulips more tax-efficient than ELSS funds. But Experts say that investors should not shun ELSS because of the new LTCG Tax. Being pure equity-based instruments, ELSS funds have the potential to generate higher returns, making them an ideal long-term investment, irrespective of the new tax. ELSS is still cost-effective and fruitful for investors as the post-tax return will be greater than PPF and high-cost Ulips. Some of the new low-cost Ulips can provide returns that are comparable with low-cost equity plans. But ELSS offer better flexibility to investors than Ulips.

In ELSS, you don't need to make any multi-year commitment and can change the fund, if it is underperforming. In case of Ulips, you can only switch between funds that are offered by Ulips. And the other thing is that ELSS funds have the shortest lock-in period among all instruments under Section 80C.

You can track the report of your portfolio in ELSS and find out which ELSS fund is good to invest and performing better. The same with Ulips, but not so widely tracked. Very few investors know, which Ulips fund is best to invest. If you want to save tax, a combination of ELSS and PPF may be the best option. But ELSS generate higher returns and PPF provide a stable base with settled income.

Ideally, a mix of ELSS and PPF is good for investors but not use one instead of other. This mix will bring benefits for investors as asset allocation, pure growth, and government security bond", says Rajeev Sakhuja, CEO of PTIC INDIA.

ELSS can still yield higher post-returns even after 10% tax. ELSS funds retain high wealth generating ability.