EEE Vs EET Vs ETE: Tax Exemptions in India (2023)

When it comes to tax-saving in India, it is very important to understand the meaning and difference in terms like EEE, EET and ETE.

During tax season or while having tax-related investment discussions, these three terms are widely thrown around. Sadly in India, more individuals make investment decisions with the intention to save tax than for any other reason. And that isn’t right on many levels. Do read this post on why tax planning is not enough.

So in this post, let me just refresh your memories about what these 3 terms, i.e. EEE, EET and ETE mean when it comes to tax liabilities.

To put it very simply, these terms highlight the 3 ways in which your money would be taxed at different stages of an investment. When you invest, your money goes through 3 stages:

  • Stage 1 is when you contribute/invest money initially,
  • Stage 2 is when your invested money generates return/interest, and
  • Stage 3 is when you withdraw the money at the end.

Different instrument have different tax implication at each of these 3 different stages.

Moving forward, what does the letter ‘E’ stand for? E is for EXEMPT, i.e. no tax. And what does T stand for? T is for TAXED, i.e. it is taxed.

So ‘E’ means Exempt and ‘T’ means Taxed.

Now, let’s focus on the 3 terms of EEE, EET and ETE.

If you want to invest in any investment option in India, then you can choose from several investment instruments that offer different types of tax exemptions at different stages.

These investment instruments (or as many like to call as tax-saving instruments) are divided into three categories:

  • EEE, i.e. Exempt – Exempt – Exempt
  • EET, i.e. Exempt – Exempt – Taxed
  • EEE, i.e. Exempt – Taxed – Exempt

That is,

EEE EET ETE Tax Exemption India

So first, that is the answer to questions like What does EEE stand for? Or What does EET stand for? Or What does ETE stand for?

What is EEE tax exemption?

EEE stands for Exempt-Exempt-Exempt. Here are the details:

  • The first E in EEE (i.e. Exempt 1) means that your investment qualifies for deduction at the stage of contribution. So the investor does not have to pay any tax on the part of the salary is used to invest in such a EEE investment instrument.
  • The second E in EEE (i.e. Exempt 2) means that when the investment generates a return or interest during the accumulation phase, you do not have to pay any tax on that either.
  • The third E in EEE (i.e. Exempt 3) means when you eventually withdraw from the instrument, due to maturity or otherwise (as per exit rules), then even that amount will be tax-free in your hands.

Obviously, this is the best possible tax treatment that you can ask for as an investor. But gradually, there seems to be an intent in the government to phase out such products that offer unlimited EEE tax benefits to investors.

The best example of the EEE status Public Provident Fund (PPF). As an example, here is how specifically it works for PPF. When you invest in PPF, then up to the annual limit of Rs 1.50 lakh, the PPF contribution is eligible for deduction/exemption under Section 80C. This is the first E of EEE. Now when PPF earns interest based on the latest PPF interest rates that are now updated quarterly, the interest earned is also free from tax. This is the second E of EEE. If that was not enough, on withdrawal on maturity of PPF, you get the entire PPF corpus (i.e. accumulated principal and interest) tax-free! This is the third and final E Of the EEE.

Till very recently, even the EPF Employee Provident Fund was under the EEE status. But after the new rule to tax interest on EPF contribution above Rs 2.5 lakh a year, it can’t be said to be a pure EEE product for those whose investment exceeds Rs 2.5 lakh a year.

What is EET tax exemption?

EEE stands for Exempt-Exempt-Taxed. Like EEE, the money you invest during the first stage (contribution) and returns earned during the second stage are exempted. So these are the first two EEs of EET. But at the time of withdrawal, you will need to pay a tax on it. And that is dented as the final letter T in the EET.

Obviously, taxation of the final amount (at the time of withdrawal) depending on your tax slabs, reduces your overall returns from such instruments come down,

So your investment during the contribution stage and the accumulation stage is exempt from taxes. But eventually, you got to pay taxes during the final stage at the time of withdrawal.

If you were to ask for an example, then the National Pension Scheme (NPS) is a good example. As per the latest NPS Withdrawal Rules, NPS subscribers need to use at least 40% of the NPS corpus for the purchase of an annuity. And the remaining 60% can be withdrawn as a lump sum in a tax-free manner. Do note that the amount used to purchase an annuity (minimum 40% but more can be used) is fully exempt from taxes. However, the annuity income (or pension) coming from the annuity plan will be taxed as per the tax slab in the year of receipt. So it’s a kind of EE-T kind of taxation regime that NPS comes under. Before 2004, the government employees in India were under the Old Pension Scheme (OPS) system which was proper EEE taxation. Under this scheme, the pensioner used to get a starting pension of 50% of the last drawn salary and this pension was tax free! This was a defined benefit system, unlike NPS which is a defined contribution system. Do check the difference between NPS and OPS to know more.

Another example can be ELSS funds. These too are taxed (LTCG on capital gains from equity) at the time of withdrawal. Do read about ELSS vs PPF and ELSS vs NPS to know more about these.

What is ETE tax exemption?

ETE stands for Exempt-Taxed-Exempt. In this, the money you invest during the first stage (contribution) is available for exemption. That is your first E. Now the returns earned during the second stage are taxed here. This is ‘T’. Finally, the amount you get on maturity (withdrawal) is tax-free.

A very common example of ETE status investment in India is the Five-year tax-free fixed deposit. This special tax-saving FD enjoys the ETE status. This means that the amount you invest initially qualifies for the deduction. The interest earned by the FD during 5 years is taxed. Finally, the amount you get at the time of maturity is tax-free, i.e. you don’t need to pay any more taxes.

So that was about the tax exemptions and various tax-saving investments, i.e. EEE investments, EET investments and ETE investments. Now you know what EEE means in tax, what EET means in tax and what ETE mans in tax. These are the 3 different tax exemption systems that are available for Indian taxpayers (2023)., i.e. Exempt-Exempt-Exempt (EEE) or Exempt-Exempt-Taxed (EET) or Exempt-Taxed-Exempt (ETE).

But just be reminded that taxation is just one of the many important aspects that one must consider before investing in any financial product. It’s never the only factor. So be careful when picking between the EEE or EET or ETE tax saving options.

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