To maximise returns on investment, investors prefer investment instruments that have tax benefits. For every investment, three components can be taxed by the government. These include the initial amount that is invested into an instrument, the returns or interest that is generated from the investment, and the final lump sum amount that is withdrawn by the investor. For each of the components, how much of it is taxable or whether it is taxable at all varies on a case-to-case basis.

This has given rise to the Exempt-Exempt-Exempt tax regime, wherein certain investment instruments allow for all three components to be exempted from taxation.

  1. Under this, the first exempt indicates that the investment amount is eligible for deductions.
  2. The second exempt is meant to indicate that any interest or returns earned during the period of investment is exempt from taxation.
  3. The third exempt is meant to specify that at the end of the investment period, the entire amount that is withdrawn by the investor is also exempt from taxation.

Exempt-Exempt-Exempt tax regime usually applies for long-term investments that are intended to build a corpus to meet long-term goals. For instance, investment instruments such as Public Provident Fund (PPF) and Employee Provident Fund (EPF) are covered under the Exempt-Exempt-Exempt tax regime. Other tools like ULIPs are also covered under the Exempt-Exempt-Exempt tax regime.

There are two other categories you should know about:

Exempt-Exempt-Taxable:The amount that is invested and the returns or interests that are generated in the period of investment are exempt from taxes. However, the lump sum amount that is withdrawn by the investor at the end of the investment period is liable for taxation.

Exempt-Taxable-Exempt:Investment instruments that fall under the exempt taxable, exempt category allow for the initial amount of investment and the final lump sum amount withdrawn to be free for taxation. However, the interests or returns earned on the investment instrument during the investment period is liable to taxation. These include the fixed deposits made at banks, wherein the return generated is taxed regularly.

Therefore, investing in products such as ULIPs that fall under the Exempt-Exempt-Exempt tax regime has a significant advantage due to the triple tax protection.