Tax free and Taxable Investments- What is EEE, EET and ETE?

When you do any investment you also need to understand the taxation for that investment. The investment can be completely taxable, partially taxable or completely tax free. Income Tax Act has defined the categories for investments and their nature of taxation. Most of the tax-saving schemes are covered under Section 80C which is used for deduction of your taxable income. But it is also important to know how taxation behaves for your investment, during its accumulation and at the time of withdrawal, that’s where the EEE, EET, ETE etc. comes in the picture. So let’s understand it in detail-

There are 3 stages of an investment on which tax can be levied:-

  1. Investment: When you invest in any tax saving scheme under Section 80C, it reduces you taxable income hence that investment amount becomes tax free as it is not count in your income. But if the investment is not considered for any deduction then it is considered as taxable during the investment stage.
  2. Accumulation or Accrued Interest: If you do any investment, it accrues interest or it gets accumulates in its growth phase. This growth phase can or cannot be taxable.
  3. Withdrawal or Final settlement: Final stage is withdrawal or selling your investment i.e. the final settlement where it can or cannot be taxed.

So only on these 3 stages the tax can be levied on any investment. In taxation terms, if any stage is exempted it is denoted “E” and if any stage is Taxed it is denoted as “T”. The 3 letters denote the 3 stages in same order- 1st letter is for Investment stage, 2nd letter is for Accumulation stage and 3rd letter is for Withdrawal stage. For example any investment is denoted as EET it means it is Exempted in Investment stage, and Exempted in Accumulation stage/Growth phase and Taxable during Withdrawal stage. TTT is complete taxable and EEE is completely tax free.

As per Income Tax Act as of now, there are 6 combinations exist for these taxable and tax free investments. They are-

  1. TEE: It means this investment instrument is not covered under Section 80C so during investment it is T During its accumulation stage it is Exempted and in final stage of withdrawal or sale it is again Exempted. Example for this category Residential Property, if you buy a residential property, since it is not covered under Section 80C so upfront it is taxable in investment stage. During the accumulation stage when its market price is appreciating there is no tax levied on that so it is Exempted and when you sell the property it is again Exempted, if you purchase any other residential property under preceding conditions of Section 54 (read compete details for section 54 here).This is how it falls under TEE.
  2. TET: It means at Investment stage it is Taxable, at Accumulation stage it is Exempted and at Withdrawal stage it is T Examples – Stocks and Mutual funds. These investments are not covered under Section 80C so it is Taxable at Investment stage. There is no tax during its accumulation stage because stock price or NAV of mutual funds increase there is no tax on that, hence it is Exempted at Accumulating stage. But they are Taxable when you sell your stocks or mutual fund units, the LTCG or STCG tax will be levied (read complete details about LTCg and STCG here).
  3. TTE: It means at Investment stage it is Taxable, at Accumulation stage it is Exempted and at Withdrawal stage it is E Example- Fixed Deposits and Recurring Deposits, Bonds. They are Taxable at Investment stage as they are not covered under Section80C. In accumulation stage it is Taxable as the interest accrued monthly/quarterly/half yearly or annually on FD/RD or on Bonds is Taxable as per your income tax slab. Only in Withdrawal stage they are Exempted as no tax levy on their withdrawal.
  4. EET: It means at Investment stage it is Exempted, at Accumulation stage it is Exempted and but at Withdrawal stage it is T Example- ELSS mutual fund. It is Exempted in Investment stage because ELSS is covered under Section 80C, you can claim Tax deduction for ELSS investment. In Accumulation stage it is again Exempted as during NAV growth it is not Taxable. Only in Withdrawal stage it is Taxable as after 3 years of Lock-in period, a valid LTCG tax applicable if returns are more than Rs. 1 Lakh.
  5. ETE: It means at Investment stage it is Exempted, at Accumulation stage it is Taxable and at Withdrawal stage it is E Example- Tax saving FDs, NSC, Post Office savings. It is Exempted at Investment stage because they are covered under Section 80C. In accumulation stage they are Taxable as the accrued interest on these investments are Taxable as per your income tax slab. At withdrawal stage they are Exempted.
  6. EEE: It means at Investment stage it is Exempted, at Accumulation stage it is Exempted and Withdrawal stage again it is E Examples- EPF, PPF, ULIP and NPS. They are Exempted at Investment stage because they are covered under Section 80C. In Accumulation stage they are also Exempted as the accrued interest on these investments are also not taxable and at Withdrawal stage they are again Exempted, no tax levy during their withdrawal. EPF, PPF, ULIP and NPS (for 60% maturity withdrawal amount of NPS) are considered as completely tax-free investments (read complete detail about PPF here and NPS here). EEE is the most sought and popular category as it is completely Tax free.

Summary:

Sr. no. Taxation category Stages of categories Examples
1 TEE Investment- Taxable

Accumulation- Exempted

Withdrawal- Exempted

Residential Property
2 TET Investment- Taxable

Accumulation- Exempted

Withdrawal- Taxable

Stocks of listed companies

Mutual fund units

3 TTE Investment- Taxable

Accumulation- Taxable

Withdrawal- Exempted

Fixed Deposits

Recurring Deposits

Corporate/Government Bonds

4 EET Investment- Exempted

Accumulation- Exempted

Withdrawal- Taxable

ELSS mutual fund

NPS maturity regular Annuity

Tax saving Government Bonds

5 ETE Investment- Exempted Accumulation –Taxable

Withdrawal- Exempted

Tax saving FDs

National Saving Certificate (NSC)

Post Office savings

6 EEE Investment- Exempted

Accumulation- Exempted

Withdrawal- Exempted

EPF and PPF

ULIPs

NPS (maturity 60% lumpsum amount)

 

This is how taxation on investments works, if you have invested in any scheme or plan you should check how its taxation works. Happy Investing.

Finance Tapasvi

Kapil Khatri

I write about Finance, Economic and Social issues. I also write on topics which have public importance.

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