All Courses are free for limited time.
NISM Professor

EET

A tax pattern where an investment is exempt going in and exempt while it grows, but taxed only when it is withdrawn or transferred — the workbook's own example is ELSS.

In plain language

Every rupee-saving investment can be tracked through three moments: putting money in, watching it grow, and taking it back out. At each moment the tax law can say Exempt or Taxable.

EET means exempt, exempt, taxable, in that order. The investment gets a tax break going in. It is not taxed while it grows. Only at the very end, on withdrawal or transfer, does tax finally show up.

The workbook's own example is the Equity Linked Saving Scheme (ELSS).

How it works

The three stages, as the workbook defines them:

Stage 1: money is invested        -> Exempt  (a deduction is available)
Stage 2: the investment grows     -> Exempt  (no tax on the growth itself)
Stage 3: transfer or withdrawal   -> Taxable (tax is charged here)

For ELSS: the investment qualifies for a Section 80C deduction of up to Rs 1,50,000 (old tax regime only) — that is the first "E". Nothing is taxed while units sit and appreciate — the second "E". On redemption, because ELSS is an equity-oriented fund with a mandatory three-year lock-in, any gain is automatically long-term and taxed under Section 112A: exempt up to Rs 1,25,000 a year, 12.5% above that — the "T".

The workbook footnotes that the first "E" — the deduction — is not available under the new tax regime. Choose the new regime, and an EET product like ELSS effectively behaves closer to a plain taxable investment on the way in, while stages two and three are unchanged.

A worked example

Mr Nair, in the old tax regime and the 30% slab, invests Rs 1,50,000 in an ELSS fund.

Stage 1 (investment):  Rs 1,50,000 deducted under Section 80C
                        Tax saved = 1,50,000 x 30% = Rs 45,000
Stage 2 (growth):       Units grow to Rs 3,00,000 over 4 years. No tax on this growth.
Stage 3 (withdrawal):   He redeems all units after the 3-year lock-in for Rs 3,00,000.
                        Long-term capital gain = 3,00,000 - 1,50,000 = Rs 1,50,000
                        Exempt up to Rs 1,25,000; taxable balance = Rs 25,000
                        Tax at 12.5% = Rs 3,125

Had he instead chosen the new tax regime, Stage 1 would have given him no deduction at all — only Stages 2 and 3 would still apply.

Why NISM asks about it

Chapter 7 (Concepts of Taxation), section 7.16, "Taxation Regime," introduces EEE, EET and ETE together with a summary table naming ELSS as the EET example, PPF as the EEE example, and tax-saving bank fixed deposits and the Senior Citizen Savings Scheme as ETE examples. Expect a question that asks you to classify a named product, or one that asks how the new tax regime changes an EET product's effective classification.

Common exam traps

  • EET means taxable only at the end, not at the start. A common slip is treating EET and ETE as interchangeable — they differ on which of the three stages carries the tax.
  • ELSS is the workbook's named EET example. PPF is EEE, not EET — do not swap the two in an answer.
  • The new tax regime removes the first "E" for most such products, since Section 80C deductions are not available there — the growth and withdrawal treatment is unaffected.
  • "Taxable at withdrawal" for ELSS still means capital gains tax under 112A, with the Rs 1,25,000 exemption and 12.5% rate — it is not taxed at slab rate.

Check yourself

  1. 1.An individual who is a Resident but Not Ordinarily Resident earns interest on a bank deposit held abroad. How is it taxed in India?

    1. a)Taxable, because all residents are taxed on worldwide income
    2. b)Not taxable, because it is neither Indian income nor foreign income derived from a business controlled in or a profession set up in India
    3. c)Taxable at half the normal rate
    4. d)Taxable only if it exceeds Rs 15 lakh
    Show the answer

    Answer: (b) Not taxable, because it is neither Indian income nor foreign income derived from a business controlled in or a profession set up in India

    An RNOR is taxed on Indian income and on foreign income only if it is derived from a business controlled from India or from a profession set up in India. Foreign bank interest meets neither test, so it is not taxable. The workbook makes exactly this point in its Mr A example: if Mr A were RNOR instead of ROR, the interest income from the USA bank account will not be taxed in India.

  2. 2.How does a critical illness policy differ from a health insurance policy in the workbook's comparison?

    1. a)The health policy is a defined benefit policy and the critical illness policy an indemnity policy
    2. b)The health policy is an indemnity policy reimbursing actual hospitalisation expenditure, while the critical illness policy is a defined benefit policy paying a lump sum usable for any purpose
    3. c)Both are indemnity policies but with different sums insured
    4. d)The critical illness policy also pays on death
    Show the answer

    Answer: (b) The health policy is an indemnity policy reimbursing actual hospitalisation expenditure, while the critical illness policy is a defined benefit policy paying a lump sum usable for any purpose

    The workbook's table sets it out in three rows. Type of policy: INDEMNITY versus DEFINED BENEFIT. Primarily designed to cover: REIMBURSES ACTUAL EXPENDITURE INCURRED IN HOSPITALIZATION versus PROVIDES A LUMP SUM that can be used either to generate lost income or to meet any other purposes, INCLUDING MEETING HOSPITALIZATION EXPENDITURE. Claim paid: ON INCURRING COVERED HOSPITALIZATION EXPENDITURE versus ON CONTRACTING PRE-SPECIFIED DISEASE AND SURVIVING FOR 15-30 DAYS. Note also that a critical illness policy makes no payment on death.

  3. 3.What is the key difference between the retirement goal and other financial goals such as buying a house or funding education?

    1. a)Retirement requires a smaller corpus
    2. b)No company gives loans for meeting retirement needs, whereas easy finance is available for other goals
    3. c)Retirement has a more precisely defined time horizon
    4. d)Retirement can be funded entirely by the employer
    Show the answer

    Answer: (b) No company gives loans for meeting retirement needs, whereas easy finance is available for other goals

    Many goals can be met comfortably through loans if one does not have enough assets accumulated. Based on earnings and work profile, financial institutions approach individuals with their best offers. Thus, for all these goals one has easy finance available. THAT IS NOT THE CASE WITH RETIREMENT, SINCE NO COMPANY GIVES LOANS FOR MEETING RETIREMENT NEEDS. STILL, MOST PEOPLE DO NOT WANT TO TALK ABOUT IT.

Where this is taught

Free preparation for NISM Series X-B

Related terms

← All terms
Something look wrong? Report it