When it comes to saving income tax in India, two options often top the list: Equity Linked Savings Schemes (ELSS) and term insurance plans. Both fall under Section 80C tax savings, offering deductions of up to ₹1.5 lakh annually. But they serve very different purposes.
So, when comparing ELSS vs term insurance tax benefit, which one suits your financial goals better in 2025?
Let’s break it down in simple terms.
What is ELSS?
ELSS, or Equity Linked Savings Scheme, is a type of mutual fund that offers tax benefits under Section 80C of the Income Tax Act.
Key Features of ELSS:
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Market-linked returns (invests mainly in equities)
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Lock-in period of 3 years
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Eligible for tax deduction up to ₹1.5 lakh
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Gains over ₹1 lakh are taxed at 10% as Long-Term Capital Gains (LTCG)
In short, ELSS is an investment product with potential for wealth creation + tax savings.
What is Term Insurance?
A term insurance plan is a pure protection plan. It provides a life cover for a specific term (say, 20 or 30 years). If the policyholder dies during this term, the nominee gets the sum assured.
Key Features of Term Insurance:
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No maturity or return value (unless return of premium option selected)
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Provides high life cover at low premiums
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Premium paid is eligible for deduction under Section 80C
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Death benefit is tax-free under Section 10(10D)
So, term plans offer financial protection for your family in case of untimely demise—along with tax benefits.
ELSS vs Term Insurance Tax Benefit – Quick Comparison
| Feature | ELSS | Term Insurance |
|---|---|---|
| Product Type | Investment | Insurance |
| Purpose | Wealth creation + tax saving | Life protection + tax saving |
| Section 80C Deduction | Up to ₹1.5 lakh | Up to ₹1.5 lakh |
| Lock-in Period | 3 years | None (but policy should remain active) |
| Returns | Market-linked, 12–15% avg. (not fixed) | None (unless return-of-premium plan) |
| Tax on Maturity | LTCG @10% on gains above ₹1 lakh | Death benefit tax-free |
| Risk Level | Moderate to High | Low (pure protection) |
| Ideal For | Long-term investors with higher risk tolerance | Individuals looking for life cover + tax benefits |
Tax Saving Potential: ELSS vs Term Plan
ELSS Tax Benefits Under 80C:
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You can claim deduction up to ₹1.5 lakh in a financial year.
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Lock-in period is only 3 years, the shortest among tax-saving options.
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Returns are market-linked, and LTCG over ₹1 lakh is taxed at 10%.
Example:
Suppose you invest ₹1.5 lakh in an ELSS fund in April 2025. If your investment grows to ₹2.1 lakh by April 2028, the ₹60,000 gain is exempt (since it’s under ₹1 lakh). No tax to be paid.
Term Insurance Tax Exemption:
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Premiums paid are eligible for deduction under Section 80C.
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The payout received by nominee (in case of death) is fully tax-exempt under Section 10(10D).
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If you pay ₹12,000 per year as premium, that amount counts towards your ₹1.5 lakh deduction limit.
Important: To claim the term plan 80C benefits, the premium must be less than 10% of the sum assured (for policies issued after April 2012).
Which Is Better for Tax Saving: ELSS or Term Insurance?
Both ELSS and term insurance qualify for income tax return deductions, but serve very different needs:
Choose ELSS If You Want:
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Higher returns from equity markets
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To invest regularly (via SIPs) and build wealth
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The shortest lock-in period (3 years)
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A tax-efficient investment instrument
Choose Term Insurance If You Want:
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Financial security for your dependents
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Large sum assured at minimal cost
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A pure protection plan with no investment risk
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Tax benefits + peace of mind
Can You Invest in Both ELSS and Term Insurance?
Absolutely, yes.
In fact, financial advisors often recommend this combination:
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Buy a term plan to protect your family.
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Invest in ELSS to grow your money and save tax.
You can split your Section 80C limit (₹1.5 lakh) accordingly—for example:
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₹30,000 in term insurance
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₹1.2 lakh in ELSS
This way, you cover both insurance and investment needs while maximizing your tax deductions.
ELSS vs Life Insurance Tax Saving: Why the Confusion?
Many confuse term insurance with traditional life insurance policies (like endowment or money-back plans). These plans offer:
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Very low returns (~4-6%)
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High premiums
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Long lock-in periods
Compared to those, ELSS is superior for returns, and term insurance is better for pure protection.
So when comparing ELSS vs insurance for tax saving in India, make sure you’re comparing with term plans, not traditional life policies.
Real-Life Example
Meet Rohan:
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Age: 30, salaried professional
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Taxable income: ₹10 lakh/year
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Wants: Life cover + tax-saving investment
Rohan’s Plan:
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Buys a term plan with ₹1 crore cover at ₹12,000 premium
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Invests ₹1.38 lakh in ELSS via monthly SIPs
Result:
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Total Section 80C claim = ₹1.5 lakh
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Gets life cover + investment growth + tax savings
FAQs About ELSS vs Term Insurance Tax Benefit
1. Can I claim both ELSS and term insurance under Section 80C?
Yes, you can. The combined limit for Section 80C is ₹1.5 lakh per year. You can split this across ELSS, term plans, PPF, etc.
2. Is ELSS better than term insurance for tax-saving purposes?
If your goal is investment and higher returns, ELSS is better. But term insurance offers financial protection, which is equally important.
3. Does ELSS offer guaranteed returns like insurance?
No, ELSS returns are market-linked and not guaranteed. However, they have historically delivered better long-term returns than insurance-based investments.
4. Is the maturity amount from ELSS taxable?
Yes. Gains over ₹1 lakh in a financial year are taxed at 10% (LTCG).
5. Is term insurance eligible under any other tax sections besides 80C?
No, only Section 80C and Section 10(10D) apply to term plans.
6. What is the lock-in period for ELSS compared to term insurance?
ELSS has a 3-year lock-in, while term insurance has no lock-in—though you should maintain it throughout the policy term.
7. Which is better for long-term financial planning—ELSS or term insurance?
Both. Term insurance protects your family; ELSS grows your wealth. Use them together in your financial planning for tax and future security.
Conclusion: ELSS or Term Insurance for Tax Benefit in 2025?
When choosing between ELSS vs term insurance tax benefit, it’s not about either/or—it’s about using both wisely.
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Term insurance gives your family security
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ELSS builds your future wealth
Both help you save tax under Section 80C. But more importantly, together they give you a stronger financial foundation.
👉 In 2025, smart financial planning isn’t about choosing one product—it’s about creating a balanced portfolio that includes protection, growth, and tax efficiency.
✅ Key Takeaway:
Invest in ELSS for growth. Buy term insurance for protection. Use both to save tax.
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