We all have career aspirations to achieve; thus it’s very important to build the right foundation to achieve our aspirations. As you go higher up the career ladder, you’ll undoubtedly enjoy more benefits like a bigger bonus and a higher salary. And when your income levels rise, the tax you need to pay also shows a corresponding increase. Without careful financial planning, you could end up paying higher taxes. Investing in the right tax saving instruments will ensure that there is a subsequent increase in your disposable income with an increase in your salary.  

Fortunately, the Income Tax Act, 1961, includes various provisions that provide tax relief to individual taxpayers and businesses. There are multiple financial instruments that help you save taxes while simultaneously allowing you to enjoy the benefits of growth of your wealth. Typically, depending on the presence of exempt (E) and taxable (T) components, they fall under one of three categories, namely EEE, ETE, and EET instruments. 

Of these, the EEE (or Exempt Exempt Exempt) tax regime is clearly the most beneficial option. Here’s what the EEE tax system is all about.

Decoding EEE instruments:

The essence of EEE instruments is that they offer three kinds of exemptions or tax savings. These exemptions have been recognized by the IT Act solely to ensure that the taxpayer enjoys relief from high tax rates. By investing in EEE investment options, you can maximize tax savings while simultaneously enjoying capital growth.

EEE instruments can be used to claim three kinds of exemptions, as explained below.

Exempt 1: The first “exempt” means a part of the investor’s annual income, which is equal to the amount invested, is not taxable.

Exempt 2: The second “exempt” in the EEE tax regime means that the income earned on those investments is also not taxable. 

Exempt 3: The third “exempt” indicates that when money is withdrawn from the investment, that amount is also exempt from tax.

ULIP: An instrument with multiple benefits

While there are other financial instruments with the EEE advantage, ULIP, in particular, offer a host of benefits to the investor. With a plan like ICICI Pru LifeTime Classic investors enjoy tax savings at all the three phases of investment and get the two-fold advantage of wealth creation and life insurance.

Here’s a clearer look at the EEE tax system using ULIPs

To better understand the EEE tax advantage, here’s a ULIP-centric example of how the three points of exemption come into effect. 

Phase one: Investment 

This is where the investor parks money in the ULIP. Investment in ULIP is made in the form of premiums. The premium paid by the investor is split into two portions. One portion of it goes toward the insurance cover, while the other is invested in the fund of the investor’s choice. Each year, the amount paid as premium can be claimed as a deduction from the investor’s taxable income. 

Phase two: Accumulation

Over the course of the investment period, the premium invested may grow several times depending on the market’s behaviour. So, at the end of the investment period, the portion invested in the fund would have grown in value, leading to accumulation of wealth. The accumulated wealth is non-taxable. In addition to this, many insurance providers also provide financial rewards for loyal investors.

Phase three: Withdrawal 

Another excellent reason to invest in ULIPs is that they’re relatively more flexible than certain other investment instruments. After the first five years, ULIPs support partial withdrawals. 

When you withdraw funds either partially during the tenure of your investment or completely at the end of the investment period, you enjoy an inflow of money that’s also not taxable. Under section 10(10D) of the Income Tax Act, 1961, the maturity amount is exempt from tax. 

Conclusion: ULIPs are clearly the most convenient EEE tax-saving instruments available to investors. By parking money in EEE investment options like ULIP, taxpayers can safely allow their money to grow without the possibility of taxes cutting their gains. When you opt for a customer centric ULIP like the ICICI Pru LifeTime Classic, you also get to enjoy a host advantages like flexible investment strategy, useful loyalty bonuses, option of unlimited withdrawals and above all family’s financial protection.