There are various aspects to consider when investing; return, liquidity and risk being the most common. But don’t forget to consider the tax implication too, which is what this article is about.
Let’s look at how your money is offered tax relief at various stages of investment; three to be precise.
E is for Exempt.
T is for Taxed.
EEE – Exempt, Exempt, Exempt
This is unbelievably sweet.
You get a tax benefit simply for investing in a particular avenue, the interest earned is not subject to tax, and finally the maturity amount is also exempt from tax. As a young investor once said to me, “How cool is that?”
The classic example is the Public Provident Fund, or PPF.
The investment in PPF, up to Rs 1.50 lakh, is entitled for a deduction under Section 80C. Which means that you don’t have to pay tax on part of the income that equals the invested amount. The interest earned is also free from tax. It is added to the principal investment and compounded, and the accumulated amount is also exempt from tax on maturity.
Tax break on investment. No tax during the accumulation phase. Zero tax at the time of withdrawal.
You don’t have to pay any tax on the returns earned during the accumulation phase. Your income from the investment would be tax-free in your hands at the time of withdrawal.
You may not need a PPF account
EET - Exempt, Exempt, Taxed
Your investment at the stages of contribution and accumulation is exempt from tax. Unfortunately, no such luck at the time of withdrawal. You got to pay up then.
The National Pension Scheme, or NPS, is the best example.
At maturity, 40% of withdrawal is tax exempt. At maturity, you can have up to 60% of this money in a lump sum, but tax exemption will be applicable only on the 40%.
The structure of NPS is such that you have to mandatorily buy an annuity with 40% of the corpus. The income from the annuitized portion of the corpus will be subject to tax as per the applicable tax slab.
6 tax-saving mistakes
Will PPF move from EEE to EET?
In 2016, there were concerns of the interest earned on PPF being taxed. However, then Finance Minister Arun Jaitley in the Union Budget of 2016 kept the status as EEE. Investors were assured then that PPF will stay outside the tax ambit.
A government constituted Direct Tax Code task force, headed by Central Board of Direct Taxes (CBDT) member Akhilesh Ranjan, has argued for a new tax regime for individuals. In a nutshell, it aims at removing a lot of exemptions but at the same time expanding the income slabs. Once again the concern arose as to whether PPF will continue with its EEE status.
A point worth noting is that the DTC proposals made it clear that the tax-free status of existing investments will continue till their maturity, even after the implementation of the DTC. So whatever be the future, what is assured now shall stay.
How to get the best out of PPF
ETE - Exempt, Taxed, Exempt
These investments are taxed at the accumulation phase, but investment and withdrawals are not taxed.
The 5-year bank fixed deposit fits the bill.
The amount you invest is eligible for a deduction under Section 80C. The interest earned is taxed. But the maturity amount is exempt from tax.
While keeping the tax factor in mind is crucial, blindly investing just to save tax is detrimental too. Do read Tax Saving: Earn the right to invest for a better perspective.
