There are many things that work against your investments, of which the biggest is tax. But, did you know that every investment you make is taxed in a different way.
In fact, there are quiet a few ways the government taxes your investments such as EEE, EET and ETE. Today, we bring you the few most popular ones and explain how they work.
Three stages: Simply put, these tax regimes show how your financial instrument is taxed at different stages. The letter 'E' denotes exempt and the letter 'T' for tax. The three letters simply show the three different stages of investments.
The first letter shows the taxability at the time of making the investment, the second during the tenor of the investment and the third at the point of maturity or when you exit the instrument.
So, if we take an illustration of travelling in a bus; the first letter denotes how you will be taxed for entering the bus, the second letter denotes how you will be taxed during your journey in the bus and the third letter will denote how you will be taxed when you chose to exit the bus.
In EEE or Exempt-Exempt-Exempt instruments, you are exempt from paying tax at all the three stages. A typical example of EEE instrument is your Employee Provident Fund, or even your Public Provident Fund. So, when you invest in PPF, you don't even have to pay tax on the interest you earned during the tenor of the fund. Also when your investment matures, the corpus is tax-free too. Keep in mind that it's usually the long-term investments that fall under this tax regime. In fact, life insurance investment also comes under this tax regime.
In EET instruments, as the name suggests, the first two stages of the investment are exempt. You pay a tax only in the third stage or on the maturity proceeds. Your National Savings Certificate and pension plans come under this tax regimen.
Here you have to pay tax only on the interest rate you earn as income, but the investment and maturity are exempt. Example here is a tax-saving fixed deposits with a bank.
Now that you know about tax regimes, keep them in mind while investing during this tax season.