EEE (Exempt-Exempt-Exempt) Tax-Saving Schemes
Having a good understanding of tax-saving instruments will help in reducing your taxes and building your wealth over time. The Exempt-Exempt-Exempt or EEE scheme is one such investment option which provides tax exemption on investment, interest, and maturity amounts. Consider that you are investing a part of your salary in a tax-saving category like EEE. Here, at the first stage, your investment qualifies for a tax deduction and this part of your salary that you have invested in the scheme will not be taxable. The second benefit is that the interest generated from your investment amount will be exempted from tax. At the last stage, the entire income earned through this scheme, which includes the principal amount and the accumulated interest, will not be taxable at the time of withdrawal. Hence, the EEE Tax-Saving Scheme provides tax exemptions at three levels- investment, returns, and maturity[1].
Some of the popular tax-saving categories under the EEE scheme include:
Public Provident Fund (PPF)
Backed by the central government, the PPF scheme provides risk-free returns. You can open a PPF account through either a bank or a post office. Keep in mind that this scheme has a minimum investment period of 15 years and the tenure of the account can be extended in blocks of 5 years thereafter[1]. For the quarter that ended on June 30, 2024, the PPF is offered an interest rate of 7.1% per annum[2], for the fourth quarter FY24-25 the interest rates remain the same.
Sukanya Samriddhi Yojana (SSY)
Introduced as part of the Indian government's "Beti Bachao, Beti Padhao” campaign, the SSY is a deposit scheme which allows you to invest money for the education or marriage of your girl child. The scheme comes with EEE tax status and offers an interest rate of 8.2% [2].
Employee Provident Fund (EPF)
The EPF scheme has an EEE (Exempt-Exempt-Exempt) tax status, but certain conditions apply. Since the financial year 2021-22, if an employee contributes more than ₹2.5 lakh in a year to EPF and VPF, the interest earned on the excess amount becomes taxable. Also, from the financial year 2020-21, if an employer’s total contributions to EPF, NPS, and superannuation funds exceed ₹7.5 lakh in a year, the excess amount is taxable for the employee. Any interest or dividends earned on these extra contributions are also taxed. However, the final maturity amount of EPF remains tax-free. [2].
Unit Linked Insurance Plans (ULIPs)
This is another life insurance plan which can be considered by long-term investors, offering a wide range of funds including Equity Funds, Income, Fixed Interest and Bond Funds, Cash Funds, and Balanced Funds[3]. ULIPs have a lock-in period of 5 years[4]. When you buy a ULIP plan from a life insurance company, the payments made under the plan are called “premiums”.
Apart from being an insurance policy, it provides money-saving advantages in the form of ULIP tax benefits in 30s. According to Section 80C of the Income Tax Act (in case of old tax regime), you can claim tax deductions till a limit of Rs.1.5 lakhs[5] using the Unit Linked Insurance Plan plan. Additionally, under section 10(10D) of the Income Tax Act, this policy qualifies for tax exemption on maturity subject to satisfaction of certain conditions.
Why Should You Opt for a ULIP Plan?
The key benefits of investing in a ULIP scheme are listed below:
Long-term financial goals
This plan can be considered by people who have long-term goals like buying a new car, house etc. since the money gets compounded here. You can withdraw the funds under this plan after the five-year lock in period ends. You can either choose to exit or continue your ULIP. In comparison to leaving your money sitting idle investing in a ULIP plan is a better choice. To reap the best out of this plan, make sure to keep your policy going for a long time.
Income tax benefits
Under section 80C of the Income Tax Act, the premiums paid under ULIP are eligible for a tax deduction. Additionally, Section 10(10D) of the Income-tax Act allows the returns on this investment to be exempted from tax deduction upon maturity[5]. Therefore, you can claim dual benefits with this policy.
Life cover
The primary feature of a ULIP is to provide life cover benefits. This offers you a security to fall back on in case of unforeseen circumstances, while at the same time ensuring that you’re able to meet your financial goals with the market linked investment component.
The flexibility to switch
ULIPs are designed in a way that they give you the liberty to make portfolio switches between debt, equity or mutual funds through the tenure of your scheme to best suit your requirements. This switching will depend on your appetite for risks as well as your understanding of how the market is performing.
In case wealth creation and saving money for retirement fall under your financial goals, ULIPs are one of the best investment choices out there for you. Once you have determined your financial goals and figured out that a ULIP plan will help you in achieving it, then it's time to compare ULIP offerings in the market. Research and compare various components of the plan including premium payments, background expenses, ULIP performance etc. You should also look into the nature of the funds your ULIP invests in to ensure a return on investment.
FAQs
What is a ULIP?
Unit Linked Insurance Policy or ULIP is a life insurance plan that combines insurance and market linked investment that also offers several tax-saving benefits.
What Types of Funds do ULIP Offer?
Based on your investment objectives and risk appetite, there are a variety of funds that ULIPs offer. Some of these include Equity Funds, Income, Fixed Interest and Bond Funds, Cash Funds, and Balanced Funds. [3]
Are Returns Guaranteed in a ULIP?
The gains on your investment will depend on the performance of the unit-linked fund(s) you have chosen. Keep in mind that past returns of a fund do not necessarily confirm its future performance.
Can one seek a refund of premiums if not satisfied with the policy, after purchasing it?
All policyholders are entitled to a free look period starting from the date they receive the policy document. The free-look period lasts 30 days, regardless of the mode the policy was obtained. If a policyholder disagrees with any terms or conditions, they can return the policy for cancellation, providing a reason. In such cases, the insurer will refund the premium paid after deducting the proportionate risk premium for the covered period, medical examination costs, and stamp duty charges. [6]
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