3 Tax-Saving Categories You Should Invest In

People earning above ₹3 lakh per year have a duty to follow. Yes, I am talking about paying taxes. This duty is mandatory for being a citizen of the nation and is essential for the well-being of the country as a whole. I mean, taxes build roads, schools, and many of the cool places we all love to visit. 🛣️

But, when it comes to investments, giving away a part of one’s gains or accrued interest can feel a little unfair. Alas, it is what it is; or is it?

What if I were to tell you that you can fulfill all your national duties without taking a blow to your financial plans? 😌 It’s all the magic of a few Es and even fewer Ts.

Confused? You see, several investment options are available that allow exemptions & deductions. The Es and Ts I mentioned represent Exemptions and Taxation. Finding a sweet balance between the two, we will discuss a few investment options that will help you save taxes.

Along with this, I’ve got some “not-so-well-known” gems hidden in the article. Let me warn you: these fantastic options are presented randomly, so make sure to read from top to bottom.

“EEE” Category Investments

The Exempt-Exempt-Exempt, AKA the ‘EEE’ category, presents three types of exemptions for subscribers. Those three exemptions are for the principal amount, interest, and mature capital.  

In simpler words, in an EEE category investment,

• You put in money tax-free;
• Your money grows tax-free;
• You get your money back tax-free.

Pretty sweet, right?

The following are the investment options under the EEE category:

a. Public Provident Fund (PPF)

With a 7.1% interest rate, PPF is a fantastic tax-saving option introduced by the National Savings Institute of the Ministry of Finance. The government announces the PPF’s interest rate every quarter. The interest is compounded annually and is paid on 31 March.

An individual aged 18+ can open a PPF account and deposit funds either as a lump sum or at regular intervals. A minor is also allowed to open an account under the supervision of a guardian.

Along with being a low-risk investment option, PPF is also well known for being a wonderful tax-saving medium. Here’s how PPF enjoys the coveted EEE status:

Investment: Contributions made up to a maximum of ₹1.5 lakh to a PPF account are exempt from tax under Section 80C of the Income Tax Act.

Accrual: The interest earned on the PPF balance over the years also escapes the taxman's grip. This compounding effect allows the money to grow tax-free, boosting returns significantly.

Withdrawal: At maturity (15 years) or even after extending the account (in 5-year blocks), the entire amount received, including the principal and accumulated interest, is completely tax-free.

PPF is a safe and secure investment option as it is backed by the Indian government. This means there is virtually no risk of default on your investment.

Hidden Tip: You can partially withdraw specific amounts from your PPF account to tap into other tax-saving instruments. PPF allows partial withdrawals in the 7th and loan facility from the 4th financial year. Just remember one crucial detail. There is only one permitted withdrawal each year, so plan wisely.

b. ELSS (Equity Linked Saving Schemes)

ELSS is a mutual fund scheme primarily investing in equities and stocks. This makes it potentially the most lucrative tax-saving option available under the EEE category.

Unlike other options like PPF or EPF (which we will discuss next), ELSS invests in the dynamic stock market, offering the potential for much higher returns. Here are some of the other advantages:

Deduct your investment from taxable income: Up to ₹1.5 lakh invested in ELSS is eligible for tax deduction under Section 80C, reducing the taxable income and hence saving tax.

Compound your wealth tax-free: If held for more than 3 years, the returns earned on ELSS investment, including dividends and capital gains, are completely exempt from taxes.

Withdraw tax-free at maturity: After the mandatory 3-year lock-in period, you can withdraw your entire investment amount (principal + accumulated gains) without paying any taxes.

Liquidity after 3 years: While there's a lock-in period of 3 years, you can access a portion of your investment even before that for specific reasons like education or medical emergencies. This provides some flexibility if needed.

Variety of funds: Several ELSS funds cater to different risk appetites and investment goals. You can choose a fund that aligns with your financial needs.

One piece of advice though; ELSS is subject to stock market fluctuations, so your investment value may go up or down in the short term. Hence, choose wisely, be thorough in your investment research, and be patient. 😌

c. Employee Provident Fund (EPF)

EPF is a retirement savings scheme in India that serves as a mandatory contribution from both employees and employers. Think of it as a magic beanstalk for your retirement 🫘, where your money grows steadily and tax-free, thanks to its triple tax advantage:

Investment Exemption: Both employee and employer contributions (a combined 12% of basic salary and dearness allowance) are exempt from income tax.

Interest Accrual Exemption: The interest earned on your EPF balance over the years is also completely tax-free.

Maturity Withdrawal Exemption: When you reach retirement age or certain eligible situations, you receive the entire amount, including principal and accumulated interest. And the best part? The whole withdrawal amount is entirely tax-free.

Along with the usual EEE benefits, EPF also provides:

Stipulated savings: The regular contributions help you build a significant retirement corpus even if you aren't actively saving elsewhere. In the case of EPF, the lock-in period is a great help for a secure future. 🤌

Government backing: EPF is managed by the Employees' Provident Fund Organization (EPFO), a government body, ensuring its safety and security. 💪

Loan facility: You can take an advance against your EPF balance for specific needs like buying a house or medical emergencies. 🏠

The downside of EPF is that it does not allow withdrawal of any kind until retirement or specific situations, limiting liquidity. Another one is that you don't have control over how your EPF funds are invested. It is like taking a leap of faith and free-falling for a secure retirement. 👼

“ETE” Category Investments

Guess what’s the full form of ETE? Yes, it’s Exempt-Taxed-Exempt! In this category, the principal amount, AKA the investment and the withdrawal corpus, are tax-free, whereas the interest accrued over time isn’t.

A plus point of ETE category investments is that the principal amount receives a tax benefit. Under ETE, one specific investment option is available:

Five-Year Tax Saving Deposit

A 5-Year Tax Saving Deposit is a special type of Fixed Deposit (FD) offered by banks and Non-Banking Financial Companies (NBFCs) in India. You can save in a bank or post office, and the interest accrued would be tax-free. Only when the interest is transferred to the FD account does it become taxable as income.

A 10% TDS is applicable by banks on FD each year. However, post-office investments are free from TDS concerns. Hence, post office investments are a much better choice than banks regarding 5-year tax-saving deposits.

Hidden Tip: Got group health insurance? Then, enjoy the tax break option available on the group health insurance premium. You would be eligible for various deductions under Section 80(D).

If you have a health insurance plan purchased through your employer under which you cover your spouse, children, and other family members, you would still be eligible for a deduction of ₹75,000.

The only thing to remember is whether the premium is funded entirely by your employer. If that’s the case, then you won’t be able to relish these tax benefits.

“EET” Category Investments

Exempt-Exempt-Taxed AKA “EET” category refers to the tax-free option on the investment AKA principal amount and accumulation of interest over the tenure. This is represented by ‘EE’. As for the one ‘T’, the withdrawal from the investment option is taxable.

Let’s see which options are part of this category:

a. National Pension Scheme (NPS)

Allowing a tax exemption of ₹2 lakh, NPS is the ultimate retirement planning scheme. It is a versatile and portable investment option with a diversified portfolio to invest in equities (around 50% allocation), debt, government securities, etc.  
NPS exempts your contributions and accrued interest under Section 80CCD(1) and 80CCD(1B) of the Income Tax Act, respectively. Up to ₹1.5 lakh of your contribution qualifies for tax deduction, and an additional ₹50,000 is eligible. As I mentioned above, that's a combined tax saving of ₹2 lakh a year!

Taxable Portions in NPS:

Lump Sum Withdrawal: At maturity, only 60% of the accumulated corpus can be withdrawn as a lump sum, which is fully taxable. However, a 40% withdrawal as a lump sum is exempt from tax.

Annuity Income: The remaining 40% of the corpus must be used to purchase an annuity, which provides you with a regular income stream throughout your retirement. This annuity income is taxable as per your applicable tax bracket in the year you receive it.

EPFO recently updated rules for partial withdrawal from NPS. Get in-depth information about it and more by reading the article National Pension Scheme: Easy Retirement Planning.

b. National Saving Certificate: NSC (VIII)

NSC is a tax-saving investment scheme offered by the Indian government through post offices. It's a great option for individuals seeking to build a solid corpus for the long term while enjoying tax benefits.

Providing an interest rate of 7.7% per annum, NSC is a low-risk investment option backed by the government.

Though discouraged, you can withdraw your investment after one year under certain conditions, though with some penalty and loss of tax benefits.

Taxation on NSC Maturity:

Lump Sum Withdrawal: The entire maturity amount, including principal and accumulated interest, is tax-free. But this comes with a small stipulation. To benefit from the tax-exempt nature, you must hold the NSC for the full five years and reinvest the interest earned each year.

Premature Withdrawal: If you withdraw your NSC before five years, the entire interest accrued till withdrawal becomes taxable as "Income from Other Sources" in your applicable tax bracket. You also lose the tax deduction benefit on the invested amount.

c. Pension Schemes:

Deductions under Section 80(C) for investments of up to ₹1.5 lakh are available for pension schemes as part of the ETE category. Regular pension plans provided by insurance companies all fall under this category.

The growth of the invested amount and the principal is not taxable, but the annuity received is not exempted from tax. The tax rate applied depends on the income of the holder and the tax slab the income falls under.

The Bottom Line

Many of you might think that the investments under the EEE category are a much better option than the other two. I won’t argue with you on that. But, the tax benefit and better return possibility that comes with ETE and EET are also not something to ignore.

My advice? If you have a spoonful of risk appetite, choose EEE and swim in the guaranteed tax haven. But, if you are a daredevil and are not easily deterred from taking small risks, then ETE and EET could be a swift path to a large retirement corpus.

Just do your research and think hard about your life goals. You have got it! 👍