Every year we are doing investment and tax planning. Before invest the money to grow or planning for tax saving, understanding the basic difference between investment instrument is important. We are investing the money to get better returns. The actual profit should be calculated by return from the investment – Tax on that investment. Simply looking the return from the investment may give wrong tax and investment planning. So understanding of taxation on each investment and it returns is important in your investment planning strategy.
Actual profit = return from the investment – Tax on that investment
1). EEE (Exempt, Exempt, Exempt) :
First E tells that tax exemption for money invested on the investment or tax planning instrument. Second E conveys that tax is exempted for interest or any income earned by the investment.
EEE Investments : PPF and EPF(Invested money, earned interest and total income all are tax exempted).
EEE category investment is best investment for tax planning.
2). ETE (Exempt, Taxed, Exempt) :
First E tells that tax exemption for money invested on the investment or tax planning instrument. Third E implies there is an exemption on the total income earned from the investment. But T in second denotes that the interest or profit earned by the investment is taxable.
ETE Investments : Fixed Deposit and NSC’s
3). EET (Exempt, Exempt, Taxed) :
The EE denotes that invested money and interest/profit earned by the instrument is non-taxable, but the lump sum is taxable at the end. The lump sum is taxable based on your income tax slab.
EET Investments : Unit linked pension plans, Pension plans, National Pension Schemes.
The proposed new pension system provides NPS to EEE category. But it is effective after the bill passed in indian parliament. For now, pension scheme are in EET category.
Let us take an example, you invested 80 rupees and received 20 rupees returns on the investment.
EEE category : Actual Profit = 20 ; Return money = 100
ETE category : Actual Profit = 20 – 4(tax) = 16; Return money = 96
EET category : Return money = 100 – 20(Tax) = 80
The above calculation for your understanding. We assumed that 20% tax for calculation. It may very based on your income tax slab. I hope you are clear on difference between investment and which one to choose for proper tax planning.