Tax Season is knocking at the door and maybe you are in a constant endeavor to maximize the savings.
There are three particular stages in an investment comprising of the investing phase, the accumulating phase, and the withdrawal phase. We generally invest with the sole intention of saving the maximum amount of tax as well as the capital increase of the investment. On every investment you made, you will receive a lump sum of money after a stipulated period. In this situation, the above three stages come into the picture.
Based on the taxation on each phase, the tax liability is divided into 3 major types which will tell you on which stage the tax is exempted and on which this is taxed. To boost up the investment, the Government made some necessary deductions on the various investments as well as exemptions based on those incomes.
But before we go further into the tax exemptions, it is imperative to have a thorough knowledge of the three major stages of investment. So let’s start.
Three Major Stages of Investment
There are mainly three stages of investment.
- Investment Phase
- Accumulation Phase
- Withdrawal Phase
This phase includes those investments which are made based on your choice. It indicates spending your penny and making a fruitful investment. The first phase is not an end to it since it demands contributions on a regular basis. Each and every time, you invest a particular amount it becomes a significant part of the investment phase.
This phase is quintessential since the investments made earlier comes with a return which could be either through interest or the amount invested in mutual funds as per the progress in the market.
The accumulation is also that phase where value seems to rise up.
This phase involves the withdrawal of the amount of money invested and the income incurred during the accumulation phase. The withdrawals take place is a lump sum amount. Most of the investments you made require the withdrawal of a lump sum amount.
However, there are other investors which come with maturity in phases.
Tax Treatment on Each Stage of Investment
On the basis of the tax investments made on the threes stages, investments are divided into the following categories
The letter T generally stands for Tax and letter E implies Exempt. Exempt signifies those investments which are subjected to deduction of tax under Chapter VI of the Income Tax Act.
Investments that are not under the purview of tax are not taken into consideration. This is owing to the fact that the investments made are only for getting good returns. Suppose, let’s take debt funds or liquid funds.
These funds will not provide tax deductions under the specified Act. Any amount of profit incurred or withdrawal made is considered to be a part of the capital gains. Also, if there is any income it comes under the Act as well.
In this kind of investments mentioned above, the decision taken to invest is purely taxed neutral. It is nothing to do with taxes. But it is dependent on the profit incurred. For those investments which we have just discussed, there is something about the income tax savings at different stages of investment.
EEE or Exempt-Exempt-Exempt
These investments are exempted from all the basic three stages of investment. The most common example of these investments includes Life insurance policy, Public Provident Fund, Employee Provident Fund, Equity Linked Saving Scheme and many more.
These investments will give you major deductions under section 80C when you leap forward in this investment. The income which you will earn from this is entirely tax-free and henceforth, you won’t have to pay any tax on the withdrawal.
Let’s make things simpler for you through the example of the Maximize Insurance plan. Investments made on this particular plan covers fundamental insurance like child education. There are no separate allocation charges for this. It simply indicates the fact that the entire amount invested in funds is based upon the risk aptitude of the investor.
This plan provides triple benefits to the main policyholder if there is the certain demise of the holder. In this case, the first benefit will be given to the family. The second benefit involves ana annual sum which is equal to the annual premium amount which goes in favor of the family till the term ends. Moreover, the family will receive the maturity value invested upon the maturity of the ULIP Unit Linked Insurance Plan) to reach the life objectively.
The investment done under this ULIP policy is tax-free as per the norms of Section 80C and the gains on the funds are also levied. Furthermore, the receipts which cover the death benefits or the birth benefits obtained under this policy are purely exempted from tax.
EET or Exempt -Exempt- Taxed
These investments are not taxable during the investment and accumulation period but come under the purview of tax on the withdrawal. The simple example of the National Pension Scheme will make this clear.
The amount invested under this NPS scheme comes with an exemption as per the regulatory norms of Section 80C as well as Section 80CCD. No tax will be imposed when the funds will continue to mature under this scheme. However, the annual amount received which is nothing but the pension is taxable under an annuity plan you partake.
ETE or Exempt-Taxed-Exempt
These investments are subjected to tax under the act of Section 80C in the accumulation phase. But the investments made and the withdrawals are tax-free. The most common example under this section can be a National Savings Certificate and Tax Saver Fixed Deposits.
It comes with a major exemption under the Income Tax Act. But the interest earned on this is taxable under daily slab rates. No tax will be levied upon withdrawal or at the time of maturity of the investments.
Tax Benefits from EEE
There are some of the major types of benefits available under the EEE tax benefit. This includes the Public Provident Fund (PPF), Voluntary Provident Fund(VPF), and Sukanya Samriddhi Account.
PPF (Public Provident Fund)
It is a long term scheme that comes with an exclusive rate of interest and returns on the amount of money invested. The interest incurred and the return obtained will not come under the regulatory act of Tax.
PPF is one such investment that comes under the arm of the Exempt-Exempt-Exempt category. Otherwise, you can simply conclude that deposits made under this scheme are subjected to tax exemption under the realm of Section 80C.
Moreover, the collected amount, as well as the speculated amount, comes under the tax deduction category during the time of withdrawal.
VPF (Voluntary Provident Fund)
VPF is nothing but a voluntary fund contribution from the employee to his parent provident fund account. It is basically considered as the 12 % contribution made by the individual towards the EPF account. The maximum contribution amounts up to 100% of the Basic Salary and Dearness Allowance. Interest made here is similar to the interest of EPF.
The present rate of EPF is almost 8.55 %. In the previous month, the government announced the increase in the rate of interest of EPF which is near about 8.65% of the fiscal year 2018-2019 from the pre-existing 8.55%.
You will enjoy the tax benefit of up to 1.5 lakh under Section 80C. The interest so obtained is deducted till 9.50% under the Income Tax Act devised in 1961. When the amount of VPF is matured it will be free from tax.
VPF comes with a viable option of loans for different purposes like child’s education, home loan, marriage, etc. Therefore, it is imperative to make investment planning at the advent of the Fiscal year. This will facilitate the savings goal.
Sukanya Samriddhi Account (SSA)
Sukanya Samriddhi Account (SSA) is a major deposit scheme meant for the girl child which is launched as a subsidy of ‘Beti Bachao Beti Padhao’ campaign. It turns out to be 8.1% and comes with the income tax benefit under Section 80C.
While you are investing under the PPF scheme, tax is deducted from the interest as well as the maturity amount under EEE. The same goes for the Sukanya Samriddhi Account. In the realm of protecting or securing the future of a girl, the later deposit scheme is worthwhile.
Therefore, it is indispensable to know which category of investment comes under which section so that you can file your tax accordingly. There are various kinds of taxes in India and the income tax comes under the umbrella of major direct tax.
If you are perplexed about direct taxes, then these are those taxes that are imposed directly on the income that means your annual gross income. So read this article to get a broader overview of the various taxes so that you can learn the smarter approach of making various investments and create your portfolio. Therefore, make smart investments and take into account those taxes from where you can get maximum return and if you think this article is relevant for you, check the InvestPolicy to educate yourself more.