Dr. Sanjiv Agarwal

Domestic savings are crucial, both for the national economy as well as for the people who save, particularly during recessionary times. This was proved once again, wherein unlike many Western countries, India remained fairly insulated from the recent global economic slowdown due to its relatively high level of savings. Ideally one should save 20-30 percent of his earning for future needs. For salaried people, savings are forced ones, thanks to tax saving plans. While in India, average savings are in the range of 30-32%, saving rate in Japan is 28%, and in US just 12 percent. Indian savings generally get parked in bank deposits, insurance products, provident fund & pension plan and mutual fund & capital market instruments.

Savings are generally made from the taxable income, which has already been subjected to income tax. However, there are certain savings avenues that enjoy exemption from taxation. What’s more, the income or returns arising from such savings or investments are also exempt from tax. Furthermore, when these savings are redeemed on maturity (end of policy term or tenure of the savings instrument), they are not subjected to any income tax. These savings vehicles, which are not taxed at any point in time, follow the exempt-exempt-exempt (EEE) model of tax savings. Investment in employee provident fund (EPF), public provident fund (PPF), and national savings certificate (NSC) are typical examples that follow the EEE model. Following Table features various tax models and their respective examples:





EEE Exempt Exempt Exempt PPF, insurance
EET Exempt Exempt Tax New Pensions System
ETT Exempt Tax Tax Tax-saving bonds/DDB
TTT Tax Tax Tax N.A.
ETE Exempt Tax Exempt Capital gains bonds

The EET model is in accordance to the international practice for the purpose of tax savings. The first E indicates that the original investment or contribution is exempt from tax. The second E signifies that returns or income or accumulation on the investment are also exempt from tax. The T, however, indicates that all redemptions or maturity withdrawals are subject to tax. Thus, effectively, under EET, any investment subject to specific exemptions will be taxed at least once; if not at the time of investment, then at least at the time of redemption.

Tax savings—The revised  DTC regime

Type Investment Returns Withdrawals
PPF/ GPF Exempt Exempt Exempt
NSC Non-exempt Tax Tax
Term deposits Non-exempt Tax Tax
Insurance Exempt Exempt Tax
ULIPs / ULPPs Exempt Exempt Tax
Pension Plans Exempt Exempt Exempt
Infra Bonds Exempt Tax Exempt
Life Insurance Exempt Exempt Exempt
Annuity Schemes Exempt Exempt Exempt
Gold ETFs Non-exempt -NA Tax

The salient features of the EET model of taxation under the DTC include the following:

The contribution and accumulation / accretion are exempt from tax as long as it remains invested;

  • All withdrawals prior to (or at maturity) are subject to tax at the applicable personal marginal rate of tax;
  • Deductions are provided in respect to contributions to any account maintained with any “permitted savings intermediary” during the financial year;
  • The account is required to be maintained with any “permitted savings intermediary” in accordance to the scheme framed and prescribed by the Central Government. These “permitted intermediaries” include approved provident funds, approved superannuating funds, life insurance and the New Pension System Trust;
  • Any withdrawal made, or amount received, under any circumstances from this account will be included in the income of the assessee under the head ‘Income from residuary sources’ in the year in which the withdrawal is made or the amount received;
  • The withdrawal or the receipt will be subject to tax at the appropriate personal marginal rate.

The EET is considered a fair and equitable way of tax savings as it encourages savings and, at the same time, follows a progressive approach towards taxation. The withdrawals at, say, maturity do not actually represent the income of that year alone. Under EET, at the time of withdrawal, both the original investment and accumulated income are taxed. As long as investments are made from taxable income, it is fair enough. However, distortion will creep in when such investments are made from non-taxable or exempt income. In other words, what was not taxable at the time of investment would now get taxed at the time of withdrawal. In such a scenario, the EET model may lead to double taxation and create inequity and regression between two tax payers.

The DTC Code has clarified on the taxation of accumulated balance of savings as on March 31, 2012

On long term savings front, there is a good news that saving scheme such as Government provident fund, public provident fund, popular as PPF and recognized provident funds will continue to enjoy exempt exempt exempt (EEE) status, ie, investments, income or accumulation and withdrawal or redemption – all will be tax exempt. Earlier there was a proposal to tax the withdrawals.  Not only such saving plans but pension funds administered by pension fund regulator including pension of Government employees will enjoy the EEE status. The exemption will be available for both, earlier as well as new investments as status quo has been maintained. This will also help the issue of taxing surplus funds of charitable institutions.

Investments made, before the commencement of the DTC (1.4.2010), in the instruments which enjo EEE states of taxation under the current law, would continue to be eligible for EEE method of tax treatment for the full tenure of savings instrument.

The revised DTC propose to continue with the exempt-exempt-exempt regime for Government provident fund, public provident fund and recognised provident funds and the person schemes administered by the Pension Fund Regulatory and Development Authority. In addition, approved pra life insurance products and annuity schemes would also qualify for the similar tax benefit the revised DTC sates that universal social security benefits for the taxpayers may not be possible in near future. Also, switching over to a complete EET regime of taxation for all savings instruments would entail many administrative, logistical and technological challenges.

The “permitted savings intermediaries” are required to be approved by the Pension Fund Regulatory and Development Authority (PFRDA). These intermediaries will, in turn, invest the amounts deposited with them in government securities, term deposits of banks, unit-linked insurance plans, annuity plans, bonds and securities of public sector companies, banks and financial institutions, bonds of other companies enjoying prescribed investment grade rating, equity-linked schemes of mutual funds, debt-oriented mutual funds, equity and debt instruments. The choice of instruments will, in some schemes, be with the investor and in some others, with the trustees of the schemes.

Thus, EET is going to be the most significant change for investments in approved provident funds, superannuating funds, public provident funds, life insurance and the NPS. This may also change investment and saving patterns in future as people may shift to short-term instruments or market-related vehicles.


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September 2021