What are these Jargon of Taxation?
Every investment is passes through a cycle of taxation at various stages. There are three stages of every investment: Initial stage of contribution in which you decide and invest, second stage is starts when you get the return of your investment in form of interest, dividends etc and third stage is when you decide to withdraw or redeem the investment including the interest or return on investment. Each and every stage has a different taxation.
What is EEE Taxation?
EEE is an abbreviation of Exempt, Exempt, Exempt. This is the most loved version of taxation for every taxpayer because there is no taxation from the inception to the redemption.
Here, the first Exempt means that your investment is an admissible deduction and you don’t required paying any tax on the part of your invested income. Second Exempt also entails that there is no tax on the return earned during the period of holding of investment. The third and final Exempt means that you don’t have to pay any tax on the income or amount you receive at the time of withdrawal or redemption of the investment.
Generally, EEE is available for long-term investment i.e. for a period of around 5 years or more such as Public Provident Fund and Employees Provident Fund. Currently, other tax saving instruments admissible for deduction under section 80C such as equity-linked savings schemes (ELSS) and life insurance policies also enjoy the EEE status.
What is EET Taxation?
EEE stands of Exempt, Exempt, Taxable. In this version your investment and return from the investment is totally tax-free but at the time of redemption or withdrawal you require to pay tax on the amount received or receivable including interest, dividend, bonus, capital appreciation or any other form of return by whatever name called which is denote by T in EET.
This type of taxation brings down the overall returns of investment because the whole accumulate amount (principal plus interest) is taxed at the time of withdrawal. For example say you fall in tax slab of 30% and rate of return of your investment is 7%. Now because of the tax on the withdrawn amount you will be getting only 30% of the total accumulated amount i.e. you rate of return will be 4.9%.
What is ETE Taxation?
ETE means Exempt, Taxable, Exempt. In this case, tax is to be levied only on the return on the investment. The investment and withdrawal amount both would be tax-free you would have to pay a tax only on the interest component. For instance, a five-year fixed deposit is tagged as ETE because the amount you invest initially i.e. deposit with the bank, qualifies for a deduction at the contributing stage, the interest is taxed and at the time of maturity you need not to pay tax on your principal.
So the next time before going for any investment if any of your financial planner use these jargon you would be knowing what he actually means and what tax liability you would be facing.