Taxation of the income earned on investments is an important factor to consider while selecting the right financial instrument. If the income either as capital gains or interest income of an investment is taxable, it gets added to one’s income. Subsequently, there is a tax liability for you to meet on the income earned. Effectively, the post-tax income in your investment will be lower than the nominal return. The tax has to be paid based on your income tax slab.
There are three stages of taxation in any investment -the investment stage, accumulation stage and the maturity stage. If there is a tax benefit in the first stage and no incidence of tax in the second stage (growth period) and in the third stage which is the maturity stage, then it means the investment has E-E-E status or exempt exempt-exempt in tax parlance.
At the time of making investments, there are tax benefits on some investments. Similarly, some investments generate tax free income. Some of the popular tax-exempt income are agriculture income and interest earned in PPF and are covered under the TAX Section 10 of the Income Tax Act.
Let’s see some of these E-E-E incomes and investments. Even though there is no tax liability in some of the investments, it is always better to disclose them while filing your income tax return.
1.Public Provident Fund (PPF):
PPF is a long-term investment option available to both salaried and self- employed individuals. In PPF, the amount of investments made, within the upper cap of Rs 1.5 lakh a year, is deductible under Section 80C of the Income Tax Act. During the tenure of PPF, which is for 15 years, there is no tax incidence on the interest income earned. The interest is subject to annual compounding and remains in maturity, the PPF corpus including the interest is tax- free in the hands of the investor. Thus, PPF is the perfect example of an E-E-E investment and remains a popular investment option for most investors. The interest rate of PPF is set by the government at the start of every quarter of the financial year.
2. Employees Provident Fund (EPF):
In case of a salaried. employee, 12 per cent of basic salary goes into employees provident fund and an equal percentage is contributed by the employer. An employee can contribute a higher amount as a voluntary provident fund. The employee’s contribution qualifies for deduction under Section 80C of the Income Tax Act and the interest earned remains tax exempt. The EPF maturity amount is also tax-free in the hands of the employee. Thus, in general circumstances the tax status of EPF is E-E-E. An important change has recently been introduced by the government. Under the new rules, the interest earned on your PF balance if the contribution exceeds Rs 2.5 lakh in a year will be taxable.
3. Equity Linked Savings Scheme (ELSS):
If you want to take tax benefit as well as earn tax exempt. income, to some extent, the equity linked savings scheme (ELSS) provides an option to do so. Of all the tax-savers, ELSS is the only one that has the lowest lock-in period of only three years. The amount invested in ELSS is deductible under Section 80C up to Rs 1.5 lakh a year while the gains up to Rs 1 lakh a year is tax exempt. ELSS is a mutual fund category with tax benefits: available to taxpayers.
4. Life Insurance Plans:
Traditional life insurance plans such as endowment and money back plan carries E-E-E tax status. The premium that you pay qualifies for tax benefit under Section 80C up to Rs 1.5 lakh a year and the maturity proceeds are also tax-free in the hands of the policyholder. However, in Ulips, the tax exemption shall be available under Section 10(10D) only for maturity proceeds of the Ulip having annual premium up to Rs. 2.5 lakh. For Ulip policies taken on or after February 1, 2021, with annual premium more than Rs 2.5 lakh the return on maturity shall be treated as capital gain and taxed accordingly.