As an investor you now have a plethora of investment options available, ranging from mutual funds, equities to fixed income securities like bank fixed deposits, bonds etc., Each and every investment you make has to go through three different stages i.e., i) Investment / Contribution stage, ii) Income Earning Stage & iii)Withdrawal or redemption stage.
Generally most of the investors tend to make investments based on the tax treatment or the tax benefits available at the investment stage only. However, we need to be aware of the taxation rules applicable in all the three stages.
For example: Let’s say you would like to book a 5 year Tax saving Bank Fixed Deposit. The investment in FD is eligible for tax deduction under section 80c. This is in the investment phase. Your capital earns ‘interest income’ for the next 5 years. This is taxable. When you redeem the FD on maturity, the withdrawal is tax-free given that tax is paid at the ‘growth or income earning stage’ itself.
If you are aware of the tax implications at various investment stages, you can pick tax-efficient investment options. Tax efficiency is a measure of how much of an investment’s return is left over after taxes are paid. Tax efficiency is essential in order to maximize net returns on our investments. You need to consider the net tax adjusted returns and not just gross returns from your investments.
However, the tax benefits should not be the main criteria for short-listing an investment option. They should be incidental and not the core.
For example : You need to buy a Term insurance plan if you need adequate life cover, not because you get Tax exemption under section 80C.
Investment Stages & Tax Treatment
As discussed above, an investment goes through three different stages;
- Investment (or) Contribution stage
- Earnings (or) Growth (or) Accumulation stage &
- Withdrawal (or) Redemption (or) Maturity stage
And in each stage the investments/earnings can either be Taxed (T) or Exempted (E) from the taxes. So, we can have 6 possible combinations of Es & Ts for three different stages as below;
- EEE : Exempt –> Exempt –> Exempt (meaning you can avail tax deductions at the time of investment, the income earned on this investment is tax exempted & even the maturity amount is tax-free)
- EET : Exempt –> Exempt –> Tax
- ETE : Exempt –> Tax -> Exempt
- TEE : Tax –> Exempt – > Exempt
- TET : Tax –> Exempt -> Tax
- TTE : Tax –> Tax -> Exempt
How are your investments taxed?
Let’s now pick various investment options and arrange them as per the above taxation regimes.
(NPS withdrawals will fall under EEE category w.e.f April, 2019)
- EEE : Under this regime, taxes are not applicable in all the three investment stages. You get tax deduction at the time of investment, the income earned on the capital is tax-free and the withdrawal is also tax free. EEE can be the most preferred choice while short listing your investment options. Some of the investment avenues which have EEE model are;
- Employees Provident Fund.
- Latest clarification on Interest earned on EPF : If an employee who is a member of EPF scheme, quits or retires from his employment and continues holding the accumulated PF balance, he/she has to pay tax on interest from the date of unemployment. So, the interest on EPF is tax-exempt only when the member is employed and the Interest credited to an employee provident fund (EPF) account after an individual ceases to be in employment is taxable in his/her hands in the year of credit. Interest that has been accrued post employment is taxable. This is as per the recent order by Income tax appellate Tribunal. (Updated on : 20-Nov-2017)
- Public Provident Fund
- Sukanya Samriddhi Scheme
- Life Insurance Policies (if your objective is to get adequate life cover, opt for Term insurance only. Other traditional plans like money-back/endowment can give you very low returns)
- Retirement Plans offered by Mutual Fund houses
- ULIPs (Unit Linked Insurance Plans)
- NPS becomes an EEE investment w.e.f 1st April, 2019 (Latest Update : Dec 2018).
- Employees Provident Fund.
- EET : The tax treatment under this model is, you can claim tax deduction at the time of investment and the earnings is tax-free, but withdrawals at the time of maturity are taxed. So,under EET, the taxation is deferred till the time of withdrawal. Most of the pension plans fall under this category.
- Unit Linked Pension Plans
- ELSS Tax Saving Mutual Funds (The LTCG on shares & Equity funds is taxable @ 10% from FY 2018-19)
- Annuity based Pension plans
- NPS (National Pension System) (Latest update Budget 2016 : The 40% of the corpus that an investor can withdraw on maturity is proposed to be made tax free. The remaining 60% of the NPS corpus has to be used to buy an annuity product. Note that monthly pension (annuity income) is fully taxable.)
- ETE : Under this arrangement, tax benefits are available at the time of investment but earnings are taxed. The withdrawal at the time of maturity is tax-exempt given that taxes are paid at the growth/earnings stage itself.
- 5 Year Tax Saving Fixed Deposits
- NSCs (National Saving Certificates)
- Sr.CSS (Senior Citizen Saving Scheme)
- TEE : At the time of investment no tax benefits are available and you invest your tax adjusted income. However the earnings and withdrawal can be tax-free.
- Tax Free Bonds (Interest income is tax-free and bonds if held till maturity, no taxes are applicable)
- TET : Under this model, earnings during the growth stage are tax exempted.
- Debt oriented Hybrid Mutual Funds
- Stocks
- Equity oriented Mutual Funds (The LTCG on shares & Equity funds is taxable @ 10% from FY 2018-19)
- Balanced or Hybrid Equity funds (No tax on capital gains on stocks/equity funds if held of more than a year)
- Debt Mutual Funds
- Monthly Income Plans of MFs
- Fixed Maturity Plans of MFs (FMPs)
- Debentures (Interest earned through NCDs, if held until maturity, is clubbed with your income and taxed at your marginal income tax rate)
- TTE : This is possibly the lest tax-efficient model of all. There is no tax deduction offered at the time of investment and earnings are fully taxable. With income taxed every year, there are no tax implications at maturity. Unfortunately, a major portion of Indian Households’ savings are invested in the financial products which fall under this category. These investment options are not only less tax-efficient but can also erode your wealth if invested for long-term.
- Fixed Deposits
- Recurring Deposits (RDs)
- Post office Monthly Income Scheme
- Tax Saving Bonds
You should invest in financial products based on your financial goals. If an investment option meets your requirements and is also a tax efficient one then it is well and good. Your investment strategy is to max out your after-tax returns.
But, do not invest in a financial product just to save some TAXES. The cost of buying wrong financial products may outweigh the cost of taxes. Tax Planning is not a goal but a tool. Remember “Tax Planning aloneis not Financial Planning.”
Continue reading :
- Different Asset classes (Stocks, Mutual Funds, Gold, Property.. ) have different Tax implications – How Returns are taxed?
- List of all Popular Investment Options in India – Features & Snapshot
(Image courtesy of Stuart Miles at FreeDigitalPhotos.net)
Good job Mr.Sreekanth. Congrats. Really useful and simple. Keep doing.
What is the tax implication on maturity of 5 year tax saving FD from SBI taken in april 24 2014? It grew from 1 lakh to 1.5 lakh
the bank is not able to tell me whether TDS has been taken. will I know only after the 26 a form is sent by the bank
Dear Jai,
You yourself can download the Form 26AS for the said Financial year from the IT dept (NSDL) website (TRACES). and check if TDS has been deducted or not.
The interest income is a taxable income.
Kindly read :
* Understanding your Form 16 & other Tax related forms (Form 16A & Form 26AS)
* Different Asset classes have different Tax implications – How Returns are taxed?
* Recurring Deposit Taxes & Fixed Deposit Taxes – How do they work? (RD & FD)
Thanks Sreekanth!
The reason I am not seeing it in 26A form is that the FD matured in April 2019.
So maybe bank would have taken TDS every year, if the interest income was above 10000 for the deposit for that year.
Now, as for the 20 .6 percent remaining to be paid as IT, can I club this interest amount to my total income, apply deductions etc, use presumptive taxation for professionals (50 percent profit) etc and then pay the tax
OR
should i pay flat 20.6 of the interest amount for every such deposit seperately?
Dear Jai,
If you have not followed ‘accrual basis’ method of taxation and not shown the interest (taxable income) in ITR then you can show the accumulated interest income on receipt basis for FY 2019-20 ie AY 2020-21, as the maturity amount has been received in April 2019.
Hi Shreekanth,
Thanks for this brilliant explanation.
I have a little confusion.
It is regarding ELSS mutual funds. You have kept it in EEE category in the image, but when you are explaining the different categories later then ELSS is mentioned under EET category.
Could you please clear this?
Also, when ELSS is taxed, only the returns are taxed or the full amount (principal + return)?
Thanks in advance.
Keep up the good work!
Dear Saurabh,
From FY 2018-19 onwards, the long-term capital gains (above Rs 1 Lakh) on Equity funds is subject to Taxes.
So, regular Equity funds fall under -> TET category
ELSS funds under -> EET category. Hence, the explanation in the post.
But, yes, I need to update the image. Will do it shortly, thank you!
Image has been updated..
I understood that.
But the important part of the question isn’t answered yet.
Lets say I invested Rs.100 in Jan-2019 in ELSS fund.
I earned Rs.40 on it till Jan-2022.
When I am withdrawing Rs.140 in Feb-2022, then will I have to pay tax on Rs.100 or Rs. 40 or Rs.140 ?
Dear Saurabh,
The tax (if any) is applicable on capital gains (returns) only ie Rs 40 in the above example and not on total proceeds ie Rs 140.
Related article :
Mutual Funds Capital Gains Taxation Rules FY 2018-19 (AY 2019-20) | Capital Gains Tax Rates Chart
Thanks Shrekanth,
The link to Capital Gain Tax was really helpful.
I retired on attaining the age of 60 years on 31st august 2018 what tax exemption on medical treatment ,I can get for for medical treatment of self (sr.Citizen) ,spouse, children who are major one. How much I can get maximum rebate/exemption u/s 80d ,my department deducted one month salary + da ,in 36 installments +balance from last pay or earned leave encasement or any other payments under medical health scheme for post retirement medical from selected hospitals for self spouse & dependents . All amount deducted during assessment year 2018-19 will be deducted under what act of income tax.
Kindly advise me.
Dear Vipan ji,
Assuming you are referring to FY 2018-19, suggest you to kindly go through this article @ Health Insurance Tax Benefits (under Section 80D) for FY 2018-19 / AY 2019-20.
Query : If I take Term insurance on my parents name :- Mom is 57years old and Dad is 63years old.
This commodity – Term insurance comes under 80C or 80D ? FIRST OF ALL ARE THEY ELIGIBLE TO TAKE TERM INSURANCE ? My taxable amount is above 10L;-)…Can’t incur more taxes !
Kindly let me know ?
Dear Satish ..Firstly, kindly understand if they really need life cover now? Do they have dependents and/or financial liabilities?
Sir,my question is”I have invested 60000 on NSC and after 5 year it’s maturity amount will be 88000.according to you the interest decided on yearly basis and add to my income every fy and deduct accordingly.
Dear Ranjeet,
As this Interest is re-invested in National Savings Certificate which is a specified instrument u/s 80C, a taxpayer can claim this amount of interest as a tax deduction under Section 80C. So, the taxpayer will first have to show this interest earned as an income and then claim this as a deduction under Section 80C.
I though ULIP falls under EEE, are you sure it is EET
Dear Prem,
You are correct. The maturity proceeds from ULIPs are tax-free.
I had used the same & correct info-graphic in other posts like ‘Different Assets have different Tax implications‘ but failed to update this post.
I have corrected it now.
Thank you!
Dear Sreekanth,
🙂
Beautiful written very informative article. Will u please explain the tax deductions in case of NSCs and RDs and PO monthly income schemes with the help of examples.
Dear Priyangshu ..The interest income from these options is taxable. Will try to publish a separate article on this.
Read: RDs/FDs & tax implications.
Hi, very informative article.
I am 28 years old and I am searching for good investment options. I just came to know about peer to peer lending as an emerging platform in India and wanted your views on that.
Hello Srikanth,
Is EPF+VPF still a EEE product?
I am hearing a lot of rumors about it. Please clarify.
Thanks,
Sandeep
Dear Sandeep ..As of now it is under EEE category only.
The new proposal to tax EPF withdrawal has been cancelled 🙂
That’s great news Sreekanth 🙂
However, I am currently saving 3500 in my VPF and want to route it towards ELSS.
What’s your say on this. My goal is to build wealth along with tax saving.
Thanks again for your help
Dear Sandeep,
For long term goal + tax saving purposes then ELSS can be a good choice.
Kindly read:
Best ELSS Tax saving mutual funds.
How to pick right mutual fund scheme based on risk ratios?
Thanks Sreekanth for all your help.
Keep rocking.
Thanks,
Sandeep
Dear Sreekanth
your blog is quite educative.
1.Please quote an example each for EEE,EET,ETE,TEE.TET,TTE with its tax u/s and tax computation, including short/long term capital gains.
2.Also elucidate the difference in Tax Free Bond ( under TEE) and Tax Saving Bond (under TTE), with an example alonwith its short/ long term capital gains.
3. kindly provide your mail id and contact no for better communication.
Thanks
GS Dhillon
09316525567
Dear Dhillon ..Will try to post one more article with the said suggestions.
Dear Sree
Thanx for prompt reply
hope for early publishing
GSD
Superb Article Sree!! Really Appreciate your simple and informative style of writing blog. 🙂
Thank you dear Parimal..Keep visiting!
Do share the article(s) with your friends.
Hi Sreekanth
Thanks for maintaining a great website.
I will be getting maturity proceeds from LIC ( policy over 20 years ) , and will also be redeeming units of equity mutual funds. Since all these are exempted from tax, should I report them at all ? If yes, should it be under the head ‘Income claimed exempt from tax ‘ ?
Thanks in advance
Dear Krishnan,
You can report them under ‘Schedule EI’ (Exempt income) of an ITR.
Dear Sreekanth, Kindly advice best hallth insurence floter scheme Rs 10 laks (adult 2+1 children)
Thanks. Krishna Basu
Dear Krishna,
Kindly go through below articles and revert to me incase if you need more details;
Best Family Floater health insurance plans.
Best portals to compare medical insurance plans.
Hi, sreekanth,
I wanted know that if my 10k investment is withdraw at 10.1k after 1ur completion, need to pay tax on 1k as per my slab (say 20%) say 0.2k I need to pay in itr form. Or 1k interest is interest free and no tax to be pay. I removed capital gain as it is redeemed after 1 yr
Dear Deepak..May I know about which investment product are you referring to??
Hi sreekanth,
I am asking about equity linked non elss funds. And elss too(after three years of saving).
Dear Deepak,
Kindly note that ‘,o Long Term capital gain taxes are levied on all equity oriented funds’ (ELSS/non ELSS funds).
Read: Mutual Fund Taxation Rules..
Hi Shreekanth,
If a person (Age 59 yrs) don’t have any source of income except the interest earned on FDs (approx 1.2Lakhs/annum). Please confirm if he has to fill income tax and pay taxes ?
Thank you !
Dear Bhupendra..Not mandatory. Has the TDS been deducted on FDs? If so either he/she can submit Form 15G or if TDS is already been deducted, can claim refund by filing ITR.
Thanks for update Sreekanth, TDS not deducted Just wanted to know if he has to pay tax in each FY.
Dear Bhupendra..If the total income earned is below the basic exemption limit then not required.
Sir, my question is about Equity Mutual Funds. If I purchase an Equity MF in Feb 2016 for 10k, and after one year if I sell it for say 10.1k and get 10.1k in SB a/c. So for next FY 2016-17, when I file ITR what should I write in STCG and LTCG fields?
Dear Vaibhav,
The LTCG on Equity mutual funds is tax-exempted. You can show this LTCG as ‘Exempt income’ in your ITR.
Read : MF taxation rules..
Sir if I buy an Equity MF in 10k and sell it at 10.1k after one year only 100/- will be considered as income right? Which I need to show in Exempt Income.
Dear Vaibhav..Yes. Read : MF taxation rules
I’ve another question. Which is best way for FDs? I don’t file 15H and let tax deduce. At year-end I file ITR and get returns. Or should I put 15G from next FY and at year end and sum all incomes and pay taxes manually? Which option will you suggest? If 2nd option, how will I pay tax manually after calculation?
Dear Vaibhab,
As you are referring to both Form 15H & 15G., may I know your age??
Also, it depends on your other sources of income.
Sir i have a doubt..You generally insists on Term insurance..I feel that the traditional insurance products gives an insurance coverage even during the policy period and still if the investor is alive,he gets extra amount in form of Bonus+FAB which comes closer to 6-7% which is an excellent option for long term (>15 years) right whereas Term insurance is only till certain time or else the entire amount gets wasted..Need your advice pls..
Dear Gowtham,
Term insurance is the basic form of life insurance cover. An earning member of the family has to buy an adequate life cover so that in any unfortunate event, his/her family members can continue same standard of living and also can meet future long term goals (if any).
Term insurance plan provides risk cover during the policy period.
If 6 to 7% makes traditional plans an excellent option to you, don’t you think investing in Provident Fund is more beneficial and a better option??
Kindly read :
Term insurance Vs traditional plans.
If life is unpredictable, Insurance can’t be Optional.
which is available at affordable premiums through Term plans.
Hmm i got it sir..
1. Please write an article about Financial planner job,Mutual fund agents and Insurance agents and their Pay and commission structure..
2. Also i have a question whether its better to insure with Private Insurance companies who gets lesser premium and lesser claim settlement ration(range of 90%) so that some money is saved which can be used for Investments..
3. Equity Mutual funds are been given good return for a longer term in India since we had a long term bullish market..Countries like Japan and some other had longer term bearish market for 40 – 65 years..So how to take decision keeping in mind that this Long term bull market will continue??
Looking forward for reply of all 3 questions above..Thanks in advance..
Dear gowtham,
1 – By any chance are you an Advisor? Will surely try to write on the suggested topic.
2 – Some of the pvt life insurance companies do have very good claim settlement track record and they offer term plans at very competitive premium rates.
Kindly read: Latest Claim Settlement Ratio of Life insurance companies. One can buy a Term plan depending on the affordability and his requirements from any life insurance company.
3 – Situation like Japan can not be ruled out in equity markets. No one can predict the future. But do note that ‘not taking sufficient RISK itself is the biggest risk of all’. One needs to invest in all possible asset classes based on his/her financial goals.
Our markets too had ‘bear phases’ in the last two decades, but still they could generate decent returns right?? Kindly share your views.
Excellent Article.
Excellent and simple explanation, about Tax treatment…