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.

• 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.

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.

• 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

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.

• 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. 

• 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. 

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. 

• 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.

Comparative Study of EEE, EET & ETE

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!