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EEE, ETE & EET Investments: Tax Saving Guide

Feb 18, 2019 | 1 year ago | Read Time: 4 minutes | By iKnowledge Team

There are 3 stages of an investment; the investing phase, the accumulating phase, and the withdrawal phase. Depending on the taxation on each phase, the tax liability on investments is categorized into 3 types depending on which stage is exempt and which stage is taxed.

The Indian tax system taxes all types of income including interest income. To provide an impetus to people to invest, the Government gives various deductions for some investments and exemptions on different types of income. This tax behaviour has led to 3 distinct types of taxation on different investments and the income arising from these investments.

But before we consider the different types of taxation on investments, it is important to identify the three stages of investment.

tax savings

What are the three stages of an investment?

Every investment has three stages.

  • Investment phase
  • Accumulation phase
  • Withdrawal phase

Investment phase:

In this phase, the investment is made in the instrument of your choice. Whether it is an insurance policy, or PPF, or a tax saving fixed deposit. This phase means actually spending money and making the investment. The investment phase does not end with the first investment. As with most investments, they require regular contributions. Each time an investment is made in the particular instrument, it becomes a part of the investment phase.

Accumulation phase:

This is the phase when the investment made in the earlier phase earns a return which could either be in the form of interest or growth of the mutual fund due to progress in the market. The accumulation phase is also when the value of the investment grows.

Withdrawal phase:

This phase is when the investment matures. At this phase, the original principal invested and the income earned during the accumulation phase is withdrawn on maturity. Most investments have withdrawal in a lump sum, whereas some others have maturity in phases. For example, a pension fund pays regular monthly pension, which means the withdrawal is in phases.

Depending upon the tax treatment at each stage of investment, the investments are classified as:

  • EEE
  • EET
  • ETE

The letter T stands for Taxed and the letter E stands for Exempt. By exempt, it includes investments which are tax-deductible under Chapter VI of the Income Tax Act under different sections.

Investments which do not get any tax deduction are not considered here, since those investments will be made purely for the sake of earning returns. For example, consider debt funds or liquid funds. These funds do not get any tax deduction under the Income Tax Act. Any gains on withdrawal are taxed as capital gains, and if any income is earned on those, it is taxed as well. For investments like these, the decision to invest is tax neutral, in the sense, it does not depend on the taxes, but purely on the gains that the investment provides. For investments which are in any of the categories above, there is some element of income tax saving at one or more stages of investment.

EEE or Exempt-Exempt-Exempt: 

These investments are exempt at all the stages of investment, i.e the investment stage, the accumulation stage and the withdrawal stage. Examples of these investments are:

  • Life insurance policies
  • Public Provident Fund
  • Employee Provident Fund
  • Equity Linked Saving Scheme

These investments earn a deduction under Section 80C when the investment is made. The incomes earned by these investments are exempt and there is no tax on withdrawal. For example, take Aegon Life’s iMaximize insurance plan, which is a Unit Linked Insurance Plan (ULIP). Investment in this plan is optimum for raising funds for life goals, such as child’s education. In iMaximize insurance plan, there are no premium allocation charges, which means the entire premium amount is invested in funds as per the investor’s risk aptitude. This plan gives triple benefits to the policyholder’s family in case of death of the policyholder. The first benefit is the death benefit which is received by the family. The second benefit is an annual income equivalent to the annual premium amount, which is paid out to the family till the policy term. The maturity value of the funds invested are received by the family on maturity of the ULIP to help with the life goal. The investment in a ULIP is tax deductible under Section 80C, and the gains on the funds are also exempt. Further, any receipts, whether death benefit or maturity benefit received under this plan are tax-free.

EET or Exempt-Exempt-Taxed

These investments are not taxed at the investment and accumulation phase but are taxed on withdrawal. One example of this is National Pension Scheme or any other pension schemes. The amount invested under NPS earns a deduction under Section 80CCC and Section 80CCD (National Pension Scheme). There is no tax when the funds invested under NPS grow. But the annuities received i.e the pension received under any annuity plan is taxable.

ETE or Exempt-Taxed-Exempt

These investments are taxed at the accumulation phase, but investment and withdrawals are not taxed. Examples of these investments are National Savings Certificate and Tax Saver Fixed Deposits. They get a deduction under Section 80C of the Income Tax Act, but the interest earned on these is taxed at regular slab rates. No tax is charged on withdrawal or when the investments mature.

Knowing which category the investment falls under is essential for proper tax planning. There are different types of taxes in India, and income tax is one of the major direct tax examples. If you are wondering what are direct taxes, they are taxes that are directly charged on the income that you earn during a particular year. Income tax saving is a smart way of making investments and building your portfolio. So, make smart investments, and consider the tax so that you get optimum returns.

II/Feb 2019/4839


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