Money Plants

Wednesday, January 25, 2006

E-E-T? What's that?

You've probably read dozens of news reports that the budget may see a migration from E-E-E to E-E-T. What in the world is that?
Well, its a very simple rule.
1) The first E stand for tax exemption at the time of investment
2) The second E stand for tax exemption in interest accrual
3) The third E stands for tax exemption at the time of withdrawal.

If E-E-E will be replaced by E-E-T, it means, the third rule will be replaced by a tax. That means, no exemption will be available on withdrawal. Of course, the E-E-E/E-E-T rule applies only for those investments that give you a tax deduction at the time of investment.

First, look at the table that shows the various investments that we have today and their tax implications at every stage, that is, at the time of investments, at the time of dividend/interest accrual and at the time of capital appreciation/ withdrawal.

You will notice that some of the investments have a tax deduction at the time of investment. It is these instruments that will come under the scanner for E-E-T. The logic is simple - you cannot get tax sops both, at the time of investment and at the time of withdrawal. Therefore, if you are getting a tax break at the time of investment, then be ready to forego a tax exemption on withdrawal.

Whether PC will steam ahead with this change or succumb to leftist pressure, we will find out on Feb 28th. For all the tech gurus out there, PC in this part of the world means P Chidambaram ;-)

P.S. I hope you can read the contents of the table. This is the best I could do with my little tech knowledge.


  • Hello Money Gardener!!

    I am impressed with all your posts..
    It is a great service...I am learning a lot through your posts! Thanks for all the enlightenment!

    and keep up your great work!!! :)

    By Blogger Suudhan Rangarajan, at 5:07 AM  

  • Hi There!
    The table mentions MIP mutula funds and pure debt funds. What about other mutual funds?Any idea what is the taxation on those?Also, in the 3rd column, what does '10% with indexation' mean?

    Nevertheless, another useful post from u, thanks!

    By Blogger vinay_ks, at 10:32 AM  

  • Hey Vinay,
    Equity mutual funds would be treated the same as 'Equity Stocks' while balanced mutual funds will be treated the same as 'MIP Mutual Funds'.

    Indexation is used to factor in inflation on your cost of purchase. If you index your cost of purchase, your cost will be higher and therfore your gain lower. Therefore, if you use the benefit of indexation, your capital gain tax will be higher at 20% since you will pay tax on lower gain. If you forego indexation, your gain is lower and hence, you pay lower tax at 10%.

    The income tax laws allows you to choose either option. So you can choose the option that minimises your tax.

    Will put out a detailed post on indexation and capital gains later.

    By Blogger Money Gardener, at 10:57 PM  

  • So it is TAX everywhere. It is again stripping the 2% tax payers.

    By Blogger REFLEX, at 8:08 PM  

  • EET is a good step forward to improve direct taxes to government and I don't think FinMin shys away from it.

    There seems to be another proposal to thwart black money, unlike the last years withdrawal tax which if extended brings back a lot of black currency into system, may be followed by removing all 500 and 1000 rupee notes.

    By Blogger Harsha, at 7:01 PM  

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