Understanding EEE, EET and ETE: Tax^* Saving Investment Guide

What is the EEE Tax Benefit Scheme?

EEE (Exempt Exempt Exempt): EEE, which stands for Exempt Exempt Exempt, concerns EEE tax exemptions related to investments, interest/returns, and maturity. 
 

For example, if you invest in a tax-saving investment plan under the EEE scheme, your initial investment is not subject to taxation. You are also eligible for an EEE tax benefit on your investment.
 

Another advantage is that you earn interest on your investment, and the interest is entirely exempt from taxes.
 

The third and final exemption within the EEE tax exemption is that when your investment matures, neither the accumulated interest nor the principal amount will be subjected to taxation.

What is the EET Scheme?

EET (Exempt, Exempt, Taxed): In this category, the investor's funds enjoy tax exemptions during the contribution and accumulation, represented by 'EE'. However, they become subject to taxation when withdrawn, as indicated by 'T'. 
 

Since both the principal amount and returns are taxable upon withdrawal, this arrangement reduces the return value, dependent on the applicable tax rate.

What is the ETE Scheme?

ETE (Exempt, Tax, Exempt): Under this tax status, only the interest component of any investment plan is subject to taxation. There are no taxes imposed on the principal amount; instead, it receives a tax benefit. 
 

However, the interest becomes taxable upon maturity. The interest that has been paid out or has accrued is taxable, while both the maturity value and the principal amount remain exempt from taxation.

What are the EEE Investment Options?

Let us look at the investment options that enjoy the EEE tax benefits:
 

1. Equity Linked Saving Scheme (ELSS)

   These mutual funds primarily invest in equities. Thanks to Section 80C of the Income Tax Act of 1961, investments in ELSS funds up to ₹1,50,000 are completely tax-free. 
    

   Additionally, the three-year lock-in period for ELSS can be waived in exchange for partial withdrawals that are also tax-free. 

2. Public Provident Fund (PPF)

   PPF is a highly favoured EEE investment option for people aiming to save for retirement and other long-term goals. It provides complete investment security, zero risk, and consistent corpus growth. 
    

   Under India's EEE tax regime, PPF investments are tax-free and enjoy tax-free status during the investment phase and when generating returns or income.
    

3. Employee Provident Fund (EPF)

   Employers are legally obligated to deduct 12 per cent of an employee's salary as an EPF contribution in the corporate sector. Investments made in the EPF are exempt from taxation under Section 80C of the Income Tax Act. Investors highly seek after this investment option because it also provides tax-free interest payments.

4. Unit Linked Insurance Plan (ULIP)^#

   A ULIP is a versatile policy that provides tax advantages and allows investors to allocate funds to various market-linked assets for long-term objectives.
    

   ULIPs come with a lock-in period of five years, although they can extend to 15, 20, or even longer. If you surrender the policy (permitted after 5 years) or when it matures, the fund value remains exempt from taxation, subject to prevailing tax norms.
    

   Note: ULIP maturity amount is tax-exempt if the total premiums paid during the financial year are below ₹2.5 lakhs.

Investment Options under ETE:
 

1. 5-Year Tax Saving Deposit

   Investors have the option to choose either a bank or a post office for this investment plan. In both cases, interest accumulates annually. As the interest income is credited to your Fixed Deposit (FD), it becomes subject to taxation. 
    

   Banks apply a 10% Tax Deducted at Source (TDS) on the FD interest each year. However, there is no TDS concern with post office investments. 
    

   Banks offer fixed deposits designed for tax savings, with a fixed tenure of 5 years. While the return is guaranteed1, it operates like a regular fixed deposit with a locked-in period of 5 years.

Investment Options under EET:
 

1. National Saving Scheme: 5 years (NSC VIII)

   The NSC offers a fixed rate of return, declared at the beginning of each financial year. You have the option to reinvest all the accrued interest from the scheme, and this reinvestment is eligible for a tax deduction. 
    

   As long as the investment continues, there are no tax liabilities. However, the maturity fund is subject to taxation, with all the accumulated profits added to the investor's taxable income for the calculation of the tax liability.

2. Pension Plans

   Premiums paid for pension plans, as per section 80CCC, are tax-free, up to ₹1.5 lakhs per year. This applies to regular pension plans offered by insurance companies, including both deferred annuity plans and immediate annuity plans. 
    

   However, the annuity received is taxable for the annuitant, and the tax rate applicable depends on their income.

3. National Pension Scheme (NPS)

   The National Pension Scheme (NPS) is a pension scheme the Government of India provides. It gathers the pension corpus during the accumulation phase and allows you to participate in the equity market2, with a maximum of 50% of the total corpus allocated to equities. The annuity payments from NPS are taxable in the hands of the annuitant.

Wrapping Up

EEE refers to tax-free status for investments throughout contribution, accumulation, and withdrawal, while ETE means tax exemption during contribution and withdrawal but taxes applied to earned interest. Lastly, EET allows tax-free contributions and accumulation but imposes taxation upon withdrawal. 
 

Higher incomes are prone to higher tax rates. Hence, opting for investment plans that come with tax benefits is the key to building your wealth.