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.
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 (ULIPs) 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.