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TAX EXEMPTIONS – UNDERSTAND EEE, EET, & ETE TAX INVESTMENTS

Tax Season is around the corner and Mr. Sharma is looking to maximise saving his tax payments. The Government of India offers relief from tax payments on certain amounts and certain investments, so that Mr. Sharma can create wealth over a period of time. He can choose from a wide range of various tax-free instruments up to a specified limit. Most of these tax-saving instruments are typically divided into three categories viz. EEE, EET and ETE investments, all of which work towards two goals; growing the capital and saving taxes. Since money is generally taxed at various investment stages, Mr. Sharma decides to find the right investment category under which he can receive maximum exemptions. Let’s understand the meanings of EEE, EET and ETE and how they can help save tax?

What is EEE?

EEE stands for Exempt Exempt Exempt and specifies three kinds of exemptions.

• Exempt 1 means that an investment qualifies for deduction. In this, a part of the annual salary, which is equal to the investment amount, is not taxable.

• Exempt 2 means that the interest earned on the investments is also exempted.

• Exempt 3 implies that the income generated from an investment is also not taxed during withdrawal.

EEE status is typically applicable to long-term investment instruments, with Employer Provident Fund (EPF) and Public Provident Fund (PPF). It also includes other investment instruments such as National Pension Scheme and life insurance policies.

What is EET?

EET stands for Exempt Exempt Taxable. As the same suggests, an investor can receive two types of exemptions on his investments, while a taxable component also exists. In an EET investment:

• The first exempt denotes that you receive exemption on a stipulated investment limit, when the investment is made.

• The second exempt implies that the returns earned on the investments are also tax-exempted.

• The taxable component means that although you receive tax exemption on investment and interest accrued, you must pay taxes when you withdraw your investment.

Since the total amount i.e. the principal amount plus returns are taxed during withdrawal, you can earn lower returns from EET investments. However, this also depends on the tax slab you belong to. For example, if Mr. Sharma receives 8% returns on his investment and belongs to the 20% tax slab, he earns only 6.4% returns on his investments. Equity Linked Savings Schemes or ELSS mutual funds fall under the EET category.

What is ETE?

ETE stands for Exempt Taxable Exempt and it is explained as follows:

• Exempt 1 denotes that the amount of income which is equal to investment amount is eligible for tax deduction basis the total limit of exemption.

• The T denotes that the interest earned on this investment qualifies as taxable

• Exempt 2 implies that the total amount withdrawn when the investment matures is tax-free.

As such, if Mr. Sharma invests in an ETE instrument, such as a tax-saving fixed deposit, he is only taxed on the interest accrued from his investment. So if he invests in an FD with a 5 year lock-in period, then the invested amount and the total amount at withdrawal qualify for deduction, but Mr. Sharma must pay taxes on the interest accrued.

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