Dr. Sanjiv Agarwal

Domestic savings are crucial to both, national economy as well as the persons who save, more so in times of recession. This has proved once again to be true, as India has by and large been insulated by the present economic slowdown, due to savings only, unlike many western countries.

Savings are generally made from taxable income, which has already  been subjected to tax provisions. There are certain savings which, if made enjoy exemption from taxation. Not only this, the income or returns arising from such savings or investments are also exempt from tax and when such savings are redeemed on maturity, they are not subjected to any income tax. Thus, such amounts of savings are never taxed at any pint of time. Such a situation works on a model of exempt- exempt-exempt (EEE). Investments in provident fund or public provident fund or national savings certificate are typical examples of EEE model, at present.

Investment in Future

Type Investment Returns Withdrawals
PPF Exempt Exempt Tax
NSC Non Exempt Tax Tax
Term Deposit Non exempt Tax Tax
Insurance Exempt Exempt Tax
ULIPs Exempt Exempt Tax
Pensions Exempt Exempt Tax
Gold ETF Non exempt Tax


This may not be so in future. Direct Tax Code envisages to shift to yet another model, exempt-exempt–tax (EET) from April 2011, as is the international practice for the purpose of taxation of savings. The first E indicates   that original investment or contribution is exempt from tax. The second E indicates that returns or income or accumulation on the investment are also exempt from tax. The T indicates that all redemption’s or maturity amount or withdrawals are subject to tax. Thus, effectively any amount will be taxed at least once, if not at the time of investment, then at the time of redemption.


The salient Features of the ‘Exempt- Exempt-Tax’ (EET) method of taxation under the Direct Tax Code are –

  • The contributions and accumulations / accretions are exempt from tax till such time they remain invested;
  • All withdrawals at any time are subject to tax at the applicable personal marginal rate of tax;
  • Deduction is provided any respect of contributions to any account maintained with any permitted asavings intermediary during the financial year;
  • The account will be required to be maintained with any permitted savings intermediary in accordance with the scheme framed and prescribed by the Central Government in this behalf- approved provident funds, approved superannuating funds, life insurance and New Pension System Trust;
  • Any withdrawal make, or amount received, under whatever 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 withdrawal is made or the amount is received;
  • The withdrawal or the receipt will be subject to tax at the appropriate personal marginal rate.


EET is considered a fair and equitable way of taxation of savings as it encourages savings and at the same time, follows progressive approach for taxation.  While withdrawals at the end do not actually represent the income of that year, it taxes the income of the year when investment was made at a deferred date (at the time of withdrawal). Under EET, what is supposed to be taxed at the time of withdrawal is both, original investment and accumulated income. So long as investments are made from taxable income, its fair but distortion shall creep in where such investments are made from non-taxable or exempt income. In effect what was not taxable at the time of investment also gets taxed at the time of withdrawal. Also, where investment is made out of income within basic exemption limit (Rs 3 lakh) in future,  inequity will creep in when such investment is taxed on withdrawal. In such a case, EET model may  lead to double taxation and create inequity and regression between two tax payers.

The following table provides various tax models –

Model Investment Returns Withdrawals Example
EEE Exempt Exempt Exempt PPF, insurance
EET Exempt Exempt Tax New Pensions Scheme
ETT Exempt Tax Tax Tax saving bonds/DDB
TTT Tax Tax Tax N.A.
ETE Exempt Tax Exempt Capital gain bonds


The Code  has clarified on the taxation of accumulated balance of savings as on 31st March, 2011 that such amount shall not be subject to tax. Only contributions on or after 1.4.2011 will be subject to EET method of taxation. So existing investors need not worry on the tax issue of present investments. Also, rollover of any amount from one scheme to other scheme will not be treated as withdrawal and hence not subject to tax.

The income from residuary sources will include the redemption or withdrawal of the principal amount from any investment that is eligible for deduction in computing the total income. However, with drawls or redemptions from provident funds and pure life insurance polices will not be included.

The code also introduces the concept of savings intermediary. Based on the aforesaid EET Principle, the code provides for deduction in respect of contributions (both by the employee and the employer) to any account maintained with any permitted savings intermediary, during the financial year. This account will be required to be maintained with any permitted savings intermediary in accordance with the scheme framed and prescribed by the Central Government in this behalf. The permitted savings intermediaries will be approved provident funds, approved superannuation funds, life insurance and the New Pension System Trust. The accretions to the deposits will remain untaxed till such time as they are allowed to accumulate in the account.

The permitted savings intermediaries would be 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-liked insurance plans, annuity plans, bonds and securities of public sector companies, banks and financial institutions, bonds of the 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 new pension scheme. This may also change investments and saving pattern in future as people may shift to short term investments or to market related investments.

Author: Dr. Sanjiv Agarwal, FCA, FCS, ACIS (UK) – Sr. Partner, Agarwal Sanjiv & Company, Chartered Accountants

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January 2021