Financial Terms Simplified: EEE, EET, ETE

This is one of the basic abbreviations that are used in the investment market. Here, ‘E’ stands for the ‘exemption’ status while ‘T’ stands for the ‘taxability’ status. These signify the rule according to which any investment is taxed. When an investment is made, the money of the investor travels through 3 basic stages—when the money gets contributed to any particular investment vehicle, when the money earns any interest or returns and when the investor withdraws the invested amount along with the acquired returns or interest value. There are tax implications at each of these stages.

EEE

‘EEE’ signifies exempt, exempt, exempt. The first exemption applies to the investment tool which offers tax exemption. The second exemption signifies a lack of any tax liability on the accumulated returns during the investment phase. The last exemption signifies that the income earned from the investment remains tax-free during withdrawal.

EEE normally applies to long-term investment plans like PPF, EPF. However, there are several other instruments like ELSS and multiple life insurance policies that also enjoy EEE status.

Some of the EEE Investment Options

  • ULIPs
    ULIPs are market-linked insurance plans wherein the investment is linked to the market performance. The policyholder gets the benefit to choose the type of portfolio he wishes to invest in, according to his risk appetite and asset allocation.
    These are life insurance schemes with a variety of investment features. Some of the most highlighting features of this category include automated portfolio management, multi-fund allocation, goal safety. It is considered to be one of the best investment instruments in the long run.
ProductULIPs
RiskMarket Linked
Investment TenureAs chosen by the policyholder from 5 to 35 years
Invests throughLife Insurance Companies
Tax BenefitPremium is tax-free U/S 80C up to INR 1.5 lakhs a year

Maturity Benefit is Tax-Free U/S 10(10)D for Plans more than 5 years and Premium: Sum Assured is at least 1:10

Even Death Benefit is tax-free without any restrictions
LiquidityPartial Withdrawal allowed after 5 years
  • Provident Fund or PF
    Provident Fund has been considered one of the safest investment options ever. Hence, this product is immensely popular, especially amongst people who wish to invest in fixed income products without any relevance to the market situations.
    Now, there are two types of Provident Fund- EPF, i.e. Employee’s Provident Fund and Public Provident Fund. EPF is a facility that cannot be availed by all. Only if your company is registered and offers you the facility, you can get the benefit of EPF.
    However, PPF is a facility that can be availed by anyone. The PPF rates are declared by the Employee’s Provident Fund Organisation from time to time.
ProductProvident Fund
RiskSovereign
Investment TenureFor EPF, it is as long as you are employed with an organisation that is registered under the PF scheme

For PPF, it is 15 years, can be extended for a period of 5 years post maturity
Invests throughFor EPF, through your organization

For PPF, through banks and post offices
Tax BenefitInvestment is tax-free U/S 80C benefit up to INR 1.5 lakhs a year and maturity is also tax-free
LiquidityA loan can be taken up to a maximum of 25% of the Amount from the 3rd Financial Year onwards on certain terms and conditions

Traditional Life Insurance Plans or Guaranteed Return Plans

As the name suggests, this type of life insurance offering guarantees a minimum return on investment. It is an ideal tool for offering protection to the family members at large despite the untimely demise of the investor.

ProductLife Insurance Plans
RiskLow
Investment TenureAs the policyholder chooses, 10 to 40 years
Invests throughInsurance Companies
Tax BenefitPremium is tax-free U/S 80C up to INR 1.5 lakhs a year

Maturity Benefit is Tax-Free U/S 10(10)D for Plans more than 5 years and Premium: Sum Assured is at least 1:10

Even Death Benefit is tax-free without any restrictions
LiquidityA loan can be taken after 3 years
  • Sukanya Samriddhi Yojana
    The Sukanya Samriddhi Yojana is an initiative backed by the Government of India which is targeted as a savings-oriented scheme for parents with a girl child. It encourages the parents to invest for the benefit of the child’s future education or even marriage. This scheme aims to build a healthy saving discipline in the parents of a girl child so that the girl’s future is secured. It can be taken by the Parent or Legal Guardian of any girl child till she is 10 years old
ProductSukanya Samriddhi Yojana
RiskSovereign
Investment TenureWill operate for 21 years from the date of its opening or till the marriage of the girl after she turns 18
Invests throughAny post office or authorised branches of commercial banks
Tax BenefitInvestment is tax-free U/S 80C benefit up to INR 1.5 lakhs a year and maturity is also tax-free
Liquidity50% of the amount can be withdrawn for higher education or marriage but only after the girl child is more than 18 years old

EET

‘EET’ stands for exempt, exempt, taxed. The money of the investor receives tax exemptions during contribution and accumulation, which explains ‘EE’, but it becomes taxable during withdrawal, which is explained by ‘T’. As the maturity amount i.e. principal + returns are taxable at withdrawal, therefore it brings down the total return value, depending on the respective slab of taxation. If any investor falls in the 20% tax bracket and the return rate subjects to 8%, then he/she will lose 20% of the total value of that return, making only 6.4% income from the investment.

EET tends to postpone some of the tax liabilities up to a few years.

Some of the EET Investment Options

  • Tax Saving Mutual Fund or Equity Linked Tax Saving Scheme (ELSS)
    If you wish to invest in the equity market through the mutual fund route and yet get a tax benefit for the same, you can invest in the ELSS scheme. 
    Investment in ELSS Scheme is tax-free up to INR 1.5lakhs a year under section 80C of the Income Tax Act but the redemption is taxable at 10%, after the initial amount of INR 1 lakh of capital gain, which is tax-free, irrespective of your income tax slab. However, ELSS schemes have a locked-in tenure of 3 years.
ProductEquity Linked Tax Saving Scheme
RiskMarket Linked
Investment TenureNo fixed duration, but there is a minimum lock-in period is 3 years
Invests throughAsset Management Companies
Tax BenefitInvestment is tax-free up to INR 1.5 lakhs p.a. U/S 80C but the redemption amount would be taxed after the initial capital gain of INR 1 lakh per annum at 10% for every investor, irrespective of the tax slab
LiquidityCan be redeemed anytime after 3 years
  • Pension Plans
    The premium payable for pension plans is tax-free under section 80CCC up to INR 1.5 lakhs a year. This is applicable to regular pension plans offered by insurance companies. There are deferred annuity plans as well as immediate annuity plans.
    However, the annuity is taxable in the hands of the annuitant as per the applicable tax rate. 
ProductPension Plan
RiskModerate
Investment TenureAs chosen by the policyholder when he wishes to retire, from 10 years onwards for Deferred Annuity Plans and immediately for Immediate Annuity Plans
Invests throughInsurance companies
Tax BenefitPremium is tax-free up to INR 1.5 lakhs a year U/S 80CCC but the annuity is taxable in the hands of the annuitant as per slab
LiquidityFor Deferred Annuity Plans, only 1/3rd of the corpus can be withdrawn Tax-free U/S 10(10)A. The rest of the amount is converted to a monthly annuity
  • National Pension Scheme (NPS)
    The NPS or National Pension Scheme is a voluntary pension facility offered by the Government of India on a defined contribution system. It accumulates the pension corpus during the accumulation phase of the investor/annuitant and gives him an opportunity to participate in the equity market up to a maximum of 50% of the total corpus. The annuity would be taxable in the hands of the annuitant. 
ProductNational Pension Scheme
RiskModerate. 

Currently, there is a 50% cap on equity exposure for the National Pension Scheme
Investment TenureLifelong. The annuity starts from Age 60 or as chosen
Invests throughPension Fund Regulatory and Development Authority (PFRDA) through various POPs
Tax BenefitYes, under section 80CCC up to INR 1.5 lakhs a year + additional INR 50,000 invested in Tier I accounts of NPS under Section 80CCD (1b), Total INR 2 lakhs

On maturity, 60% of the total corpus can be withdrawn tax-free on vesting. The remaining 40% needs to be utilised for annuity purchase. An annuity is taxable in the hands of the annuitant. 
LiquidityTier I Account is a non-withdrawable account. Tier II Account is withdrawable but no Tax Benefit is given. 60% can be withdrawn tax-free but annuity needs to be taken from the remaining 40% of the corpus. Partial withdrawal is allowed after 3 years for a specific purpose only

ETE

ETE signifies exempt, tax, exempt. Any investment tool with this status requires tax payment only on the interest component. A 5-year FD falls under this category. There is no tax on the principal rather it receives a tax benefit, but the interest is taxable on maturity. The paid out or the accrued interest is taxable, the maturity value is exempted and so is the principal.

Some of the ETE Investment Options

  • 5-Year Tax Saving Deposit
    This investment can be done in any bank or through any post office. Under both circumstances, the interest is accrued each year. As the interest income gets credited to the investor’s FD, the interest value becomes taxable. 10% TDS liability is exercised on the bank FD interest every year. However, there is no issue with TDS with post office investments. One thing must be noted that the post office FDs eventually tend to result in an enhanced maturity corpus because of higher reinvestment.
    Banks offer tax-saving fixed deposits for a tenure of 5 years during which the return is guaranteed. It is a regular fixed deposit scheme but with a locked-in tenure of 5 years. 
ProductTax Saving Fixed Deposits
RiskVery Low
Investment Tenure5 to 10 years
Invests throughBanks, other Financial Institutions
Tax BenefitInvestment is tax-free U/S 80C up to INR 1.5 lakhs a year and TDS @ 10% would be deducted from Interest for interest earned more than Rs 10,000
LiquidityIt cannot be premature for the fixed tenure
  • National Saving Scheme: 5 years (NSC VIII)
    The fixed rate of return that NSC tends to follow is declared at the beginning of each financial year. All the accrued interest of the scheme can be reinvested. The interest reinvestment is eligible for a tax deduction. Therefore, as long as the investment is continued nothing is taxable. But the maturity fund is liable to taxation with all the added profits to the investor’s taxable income for estimated tax value.
ProductNational Saving Scheme
RiskSovereign
Investment Tenure5 years (NSC VIII)
Invests throughPost Office
Tax BenefitInvestment is tax-free up to INR 1.5 lakhs p.a. U/S 80C but maturity is taxable as per slab
LiquidityCannot be prematurely redeemed but can be pledged

Comparative Study of EEE, EET & ETE

EEEEETETE
Exempt-Exempt-ExemptExempt-Exempt-TaxedExempt-Taxed-Exempt
All the 3 transactions during the investment phase are exempted from paying taxesThe maturity value is taxed; the principal and the paid or the accrued interest remains tax-freeThe investment and the maturity value is exempted from taxation but the paid out or the accrued interest is taxable
Considered to be the overall best tax-saving schemePostpones the tax liability till maturityNo taxation on the maturity value as the interest has already been taxed

Planning your taxes before investing is one of the smartest ways to invest as that not only saves you the woes at the time of filing, but helps you calculate your investment’s actual rate of return!

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