As the tax filing season arrives, the buzz around tax and tax savings picks up. There is also an increased activity on the end of tax payers to execute tax saving strategies for saving tax on next year’s ITR. In this rush, they often end up making decisions that offer neither meaningful tax savings nor better returns.
One such example of this is buying Life Insurance Endowment Policy or Money Back plans just to claim some tax deductions under Section 80C of the Income Tax Act. It definitely offers tax benefits and reduces your tax outgo. But it also has a hidden cost.
In today’s blog we breakdown the costs, and also explore a smarter and efficient to approach your 80C investments using a combination of ELSS Mutual Funds (Equity Linked Savings Scheme) and a Term Life Insurance Plan.
The Problem with 80C deductions using Traditional Life Insurance Plans
There are many taxpayers who still file taxes under the Old Regime to claim various deductions including the most popular – ₹1.5 Lakh deduction under Section 80C. While claiming deduction is perfectly valid, the real issue is the investment actions that taxpayers take to claim the deduction.
A majority of invest in life insurance endowment or money back policies because of the multiple benefits they offer: Life Coverage, Investment, and Tax Savings. While they offer “3-in-one” solution, there are gaps
- Life Coverage is really low. For a premium paid of ₹35,000 annually, the life coverage is only for ₹10 Lakhs which is not sufficient.
- Returns barely beat inflation. Most endowment policies or money back policies generate 4% – 6% at best which doesn’t help you create wealth.
- Lock-ins with limited flexibility. Insurance policies come with a lock-in. In case you need liquidity, you need to surrender your policies which come with penalties or poor payouts.
So, while there are tax benefits, there is no sufficient coverage offered and they don’t help you create wealth as they barely catch up to inflation.
What’s the Better Way: Term Plan + ELSS
Buy a Term Insurance Plan
Term Plans are pure insurance products. They don’t offer you returns like your investments. You don’t get the benefit of survival; but that is what insurance is.
You get substantial cover at a fraction of a premium. For example, a ₹1 Crore Life Insurance cover costs only ₹10,000 – ₹15,000 per year. This is 10X more coverage at 1/3rd the cost of Traditional Life Insurance Plans.
Invest the Rest in ELSS Funds
Let’s say you pay ₹15,000 for the annual premium of your Life Insurance; you can invest the remaining ₹1.35 Lakh in an Equity Linked Savings Scheme (ELSS) – a type of Mutual Fund scheme with a 3 year lock in period and claim the full ₹1.5 Lakh deduction under Section 80C.
What is Equity Linked Savings Scheme (ELSS) Mutual Funds?
As mentioned earlier, ELSS are a type of Mutual Fund category that invest majority of their assets in equity. The government and the tax authorities identify investments made in this category eligible for deduction under Section 80C. ELSS are not different than Flexi Cap Mutual Funds apart from its tax deductible advantage and a 3 year lock in period.
Why ELSS Mutual Funds?
ELSS offers the shortest lock-in period of 3 years amongst the available 80C options which generally have lock-in period of 5 years. You can also make your gains tax free as LTCG up to ₹1 Lakh per year is tax free. ELSS Mutual Funds invest in equity and hence offer potentially better returns than traditional life insurance plans.
Through ELSS, you get a better chance to multiply your wealth faster. Also, ELSS also allows you to invest in fractions regularly through SIP which can be helpful for those who want to invest regularly over the years.
You should note that if you invest in ELSS through SIP, the lock in applies to each SIPs individually and not from the day you start your SIP i.e. each SIP investment should complete 3 years before they are available for withdrawal.
Let us look at an illustration to compare both the strategies
Particulars | LIC’s New Jeevan Anand | Tax Saver FD + Term Plan | ELSS + Term Plan |
Premium | ₹1,50,000 | ₹15,700 | ₹15,700 |
Invested Amount | NA | ₹1,34,300 | ₹1,34,300 |
Lock-In Period | 2 | 5 | 3 |
Liquidity | Low | Medium | Medium |
Cover Amount | ₹43,00,000 | ₹1,00,00,000 | ₹1,00,00,000 |
Value after 30 Years | ₹1,48,35,000 | ₹1,16,56,102 | ₹4,90,47,439 |
XIRR Returns | 6.96% | 6.18% | 13.47% |
Source: LIC, HDFCLife,SBI,ValueResearch,EduFund Internal Research.
For premium calculations, we assumed an individual of 30 years of age and policy with term of 30 years.
As you can observe through this comparison, ELSS Mutual Funds comfortably leaped ahead of endowment plan and tax saver FD providing greater coverage as well as larger investment corpus at the end of 30 years. So, the next time someone pitches you an endowment or money back plan for tax savings, take a pause and ask yourselves – “Is there a better way than this?” There is, and now you know it!
Before you Invest
Before you go ahead and make an investment in ELSS, wait and evaluate if the old tax regime is still beneficial for you. If you don’t already know, deduction under Section 80C is only available under the old tax regime. With the rebate under the new tax regime, there is no tax applicable for taxpayers earning less than ₹12 Lakh per year.
Naturally, this makes the new tax regime beneficial for the majority of taxpayers which also makes investments made for Section 80C deductions inefficient and illiquid for no benefit.
So before you go ahead and make an investment, consult your CA or tax advisor or use an online tax calculator to compare which regime might be more beneficial for you.
If you find the old tax regime beneficial for you, ELSS Mutual Fund and a Term Life Insurance Plan strategy is definitely worth considering.
Disclaimer: The data in this presentation are meant for general reading purpose only and are not meant to serve as a professional guide/investment advice for the readers. This presentation has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been suggested or offered based upon the information provided herein, due care has been taken to endeavor that the facts are accurate and reasonable as on date. The information placed on the presentation is for informational purposes only and does not constitute as an offer to sell or buy a security. The Company reserves the right to make modifications and alterations to the content available on the presentation. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. The EduFund platform & the website is owned, operated and maintained by Helena Edtech Private Limited, a company incorporated under the laws of India. An affiliate of the Company, i.e. Edubillions Tech Private Limited is registered with AMFI as mutual fund distributor bearing the registration number ARN258733. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The valuation of securities may increase or decrease depending on the factors affecting the securities market.
About the author

Niraj Satnalika
Head Of Research,EduFund
Dr. Niraj is a finance professional with 12+ years of experience and is part of the founding team at EduFund. He’s worked with Goldman Sachs, CRISIL and Sakal Media in roles spanning investment management, research and leadership. With a PhD in Finance from IIT Bombay, he brings deep expertise in valuation, governance and education planning. When he’s not teaching or writing, you’ll find him cooking or going on long drives.