EEE or Exempt-Exempt-Exempt is a tax category that offers tax exemptions on investment, interest (return), and the maturity amount. This popular tax-saving category includes several investment vehicles, including PPF, ULIPs, EPF, ELSS, and SSY.
In this article, we uncover what is Exempt-Exempt-Exempt to help investors discover investment opportunities while lowering their tax liabilities.
What is EEE in income tax?
The Exempt-Exempt-Exempt (EEE) scheme offers significant tax advantages for investors in India. It aligns with the Section 80C deductions of the Income Tax Act, allowing for tax-efficient investments.
Under the EEE scheme, certain financial instruments, such as Public Provident Fund (PPF) or Unit Linked Insurance Plans (ULIPs), provide triple tax benefits. Firstly, the initial investment or contribution made towards these plans is exempt from income tax, reducing taxable income. Secondly, the interest earned on the investment is also tax-free. Lastly, upon maturity, the withdrawal of the accumulated funds is exempt from income tax, ensuring a tax-efficient return on investment.
Also read about: Income Tax Slab for FY 2024-25
Top 5 tax-free investment options for EEE
Investors in India can choose from the top 5 tax-free EEE investment options listed below:
1. Public Provident Fund (PPF)
Public Provident Fund is one of the most popular Exempt-Exempt-Exempt investment vehicles in India. PPF contributions of up to Rs. 1.5 lakhs in a financial year qualify for tax deductions u/s 80(C) of the Income Tax Act 1961. Additionally, the maturity amount, as well as the interest earned on the investment, are tax-free. Investors can open a PPF account with a minimum deposit of Rs. 500 and earn tax-free and guaranteed returns. PPF investments have a minimum lock-in period of 15 years, making the scheme a preferred investment avenue for long-term investment objectives like retirement planning.
2. Unit Linked Insurance Plans (ULIPs)
Unit Linked Insurance Plans are insurance-cum-investment products that offer investors multiple benefits, including Exempt-Exempt-Exempt tax benefits. A part of the ULIP premium paid is invested into market-linked assets, while the remaining is used to offer a protective life cover. Depending on your risk appetite and investment goals, you can choose from the different fund options with differing equity and debt allocations. Additionally, while ULIPs come with a lock-in period of 5 years, terms can be extended up to 20 years or longer. Contributions made to ULIPs are tax-free u/s 80(C) for up to Rs. 1.5 lakhs, while the maturity and death benefit payout from the plan are also tax-exempt u/s 10(10D).
Note: For ULIPs bought on/after 1st February 2021, if the premium paid for the plan is more than Rs. 2.5 lakhs, the returns will be taxed according to the ULIP’s composition.
3. Equity Linked Savings Scheme (ELSS)
Investing in mutual fund schemes like ELSS is a great tax-saving option for investors seeking to grow their corpus in a tax-efficient manner with equity-linked investments. ELSS are mutual funds that primarily invest in equities and equity-related products. Due to their focus on equity, they are exposed to significant market volatility and risks, which can potentially result in higher returns. ELSS investments qualify for tax deductions under the general Rs. 1.5 lakh ceiling of section 80C. However, if your ELSS investment is withdrawn during the 3-year lock-in window, the withdrawn sum becomes taxable. Furthermore, no long-term capital gains tax (LTCG) is applicable on ELSS returns of up to Rs. 1 lakh/year. Earnings beyond this threshold are taxed at a rate of 10%.
4. Sukanya Samriddhi Yojna (SSY)
The Indian government launched the Sukanya Samriddhi Yojana under the ‘Beti Bachao Beti Padhao’ campaign to encourage parents to save for the future financial security of their daughters. Under the scheme, parents/guardians of a girl child below the age of 10 can open an SSY account to save for her education and marriage expenses. In addition to offering the highest interest rates among small savings schemes, SSY accounts also offer Exempt-Exempt-Exempt tax benefits to investors. Contributions made to the account qualify for section 80(C) deductions. The interest earned and maturity amount are also tax-exempt.
5. Employee Provident Fund (EPF)
Every company employing more than 20 employees must register with the EPFO and offer EPF benefits to its employees. The employer is required to contribute 12% of the employee’s salary to the EPF account, and the employee must match this contribution. EPF enjoys Exempt-Exempt-Exempt taxation status provided certain conditions are met. The employee’s contribution to EPF is tax-free under the section 80(C) limit. The interest earned on the principle plus the maturity amount is also tax-free.
Note: The Indian government revised EPF taxation rules with the 2021 Budget, whereby employee contributions exceeding Rs. 2.5 lakhs in a financial year are now taxable.
Initial investment deduction
The Exempt-Exempt-Exempt investment or EEE investment model offers a significant tax advantage at the outset of your investment journey. By investing in qualifying financial instruments, you can avail of tax deductions on the invested amount. This effectively reduces your taxable income, leading to a corresponding decrease in your income tax liability. For example, investing Rs. 1.5 lakh in a Public Provident Fund (PPF) under Section 80C of the Income Tax Act can potentially lower your taxable income from Rs. 10 lakhs to Rs. 8.5 lakhs, resulting in a reduced tax burden.
Accumulation phase benefit
The second layer of tax exemption safeguards the growth potential of your investment. Interest, dividends, or income generated during the accumulation phase of your investment are not subject to taxation. This feature is especially advantageous for compounding investments, where the earned interest reinvests to generate further returns over time.
To illustrate with the Public Provident Fund (PPF) example, assuming an annual interest rate of 7.1%, an investment of Rs. 1.5 lakh would yield Rs. 10,650 in interest during the first year. Unlike other savings instruments where such interest might be taxable, the EEE model ensures complete tax exemption on this income. Over time, this tax-free compounding can substantially enhance the overall value of your investment.
Withdrawal advantage
Upon the maturity or termination of the investment, the final layer of tax exemption applies. The entire proceeds, encompassing both the principal and accrued interest or income, are exempt from taxation. For instance, if a Public Provident Fund (PPF) matures after a 15-year tenure, the total accumulated value, such as Rs. 40 lakhs, would be entirely tax-free upon withdrawal. This substantial benefit is particularly advantageous when planning for long-term financial goals, like retirement, as it allows for the full utilization of the accumulated corpus without any tax-related deductions.
Benefits of EEE for investors
The Exempt-Exempt-Exempt tax status of investments is beneficial for investors looking to reduce their overall tax liabilities. These investment options offer triple tax benefits at every stage—throughout the contribution period, accumulation stage, and on maturity. This reduces the tax burden on the investor and potentially increases the net return on the investments. Additionally, most EEE investments are long-term investments that also allow investors to benefit from the power of compounding without losing out due to high tax rates.
Times when taxes are due in India
To understand EEE in income tax, it is essential to acknowledge when taxes are due in India. We have summed up the three junctures when taxes on investments are payable:
- When you invest for tax purposes
The first instance is when you, as an investor, make contributions to an investment vehicle. If the investment vehicle falls under the Exempt-Exempt-Exempt (EEE) category, your contribution will be tax-free (usually up to a certain limit). - When you earn interest or a return on your investment
Taxes are due on the interest earned on the principal invested during the accumulation period. For EEE investments, the interest generated on the principal amount and returns are also tax-free. - When you withdraw a lump sum amount
Lastly, taxes are generally due when you withdraw the maturity amount at the end of the term. For EEE investments, such lump-sum withdrawals are also tax-free.
Conclusion
Exempt-Exempt-Exempt investments have emerged as lucrative investment avenues that allow you to maximise your gains while minimising your tax liabilities. Investing in tax-saving schemes like PPF, ULIPs, ELSS, SSY, and EPF allows investors to accumulate long-term wealth in a tax-efficient manner. Each of these EEE investment vehicles offers different features and benefits. Thus, as an investor, you must thoroughly assess them to choose the right investment vehicle that suits your investment goals and objectives.
Whether you are looking to save on taxes with ELSS funds or diversify your portfolio with other mutual fund schemes, you can rely on the Bajaj Finserv Mutual Fund Platform. On this intuitive and easy-to-use platform, you can compare mutual funds to choose the best fit and start investing via SIPs or lump-sum investments. Additionally, you can access the online mutual fund calculator tool to estimate your returns and tailor your investment portfolio and approach accordingly.
