In the case of ELSS, long-term capital gains (LTCG) exceeding ₹1.25 lakh in a financial year are taxed at 12.5%. For ULIPs, the tax treatment depends on the premium amount and the date on which the policy was issued.
Unit-linked insurance plans (ULIPs) and Equity Linked Savings Schemes (ELSS) are two popular tax-saving options available under Section 80C of the Income Tax Act. Both allow taxpayers to claim deductions of up to ₹1.5 lakh annually, but they differ considerably in terms of structure, returns, liquidity, costs and taxation.
The changes introduced in Budget 2025 have also made the tax treatment of ULIPs more complex, prompting investors to reassess which product best suits their financial goals.
Section 80C benefit
Both ULIPs and ELSS qualify for deductions of up to ₹1.5 lakh under Section 80C. However, the nature of the two products is very different.
ULIPs are hybrid products that combine life insurance with investments. Part of the premium goes towards providing insurance cover, while the remaining amount is invested in equity, debt or hybrid funds.
ELSS, on the other hand, is a diversified equity mutual fund designed primarily for wealth creation. Unlike ULIPs, it offers no insurance component and is purely an investment product.
Lock-in period and liquidity
One major advantage of ELSS is its shorter lock-in period.
ELSS investments are locked in for three years, the shortest among all Section 80C instruments. Investors can redeem or continue holding their investments after the lock-in period expires.
ULIPs come with a five-year lock-in period. Partial withdrawals and policy surrender are generally allowed only after five years, making them less liquid compared with ELSS funds.
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Returns and costs
ELSS funds invest mainly in equities and have historically delivered strong long-term growth potential. Since they are market-linked, returns are not guaranteed and depend on the performance of the underlying portfolio.
ULIPs also offer exposure to equity, debt and balanced funds. However, a portion of the premium is allocated towards life insurance coverage. They also carry several charges, including premium allocation charges, mortality charges, policy administration fees and fund management charges.
These costs can reduce overall returns, especially during the initial years. ELSS funds generally have lower expense ratios and a simpler fee structure, which makes them relatively cost-efficient.
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Taxation of gains
The tax treatment of returns is one of the key differences between the two products.
In the case of ELSS, long-term capital gains (LTCG) exceeding ₹1.25 lakh in a financial year are taxed at 12.5%.
For ULIPs, the tax treatment depends on the premium amount and the date on which the policy was issued.
For policies issued on or after February 1, 2021, maturity proceeds continue to enjoy exemption under Section 10(10D) if the annual premium does not exceed ₹2.5 lakh. If the annual premium crosses ₹2.5 lakh, the exemption is lost and gains become taxable as capital gains.
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How Budget 2025 changed ULIP taxation
The Union Budget 2025 widened the scope of taxable ULIPs.
Earlier, only ULIPs with annual premiums exceeding ₹2.5 lakh lost the benefit of tax-free maturity proceeds. Under the revised provisions, certain policies where premiums exceed 10% of the policy value may also be treated as taxable.
This means investors now need to consider both premium levels and policy structure while assessing the tax treatment of their ULIPs.
Which option should investors choose?
ELSS may appeal to investors seeking higher return potential, lower costs and greater liquidity. ULIPs, meanwhile, are better suited for those looking to combine insurance protection with market-linked investments.
The choice ultimately depends on an investor's priorities—whether the focus is on wealth creation, insurance coverage, or a combination of both.
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Published on: Jun 18, 2026 7:10 AM IST
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