Taxes form a good part of your total expenses, and anyway who likes to pay lot of taxes. But the truth is, our government allows tax saving on certain investments to bring about the saving habit. Especially for a longer horizon of three to five years or more.
Thus, there are taxsaving investments which you will be using to save tax this financial year. Similarly, some of these investments also remain tax exempt even at maturity. Thus, all investments are divided in the following three categories:
- ETT: Investment reduces tax but any accrued interest is taxed in future years including the gain at maturity.
- EET: These will offer tax reduction in the year you invest, any interest accrued in future is exempt but the maturity value is taxed.
- EEE: These are completely exempt investments, that is, your invested amount is exempt, interest accrued is exempt and maturity value is also exempt.
Since EEE investments are most tax efficient let’s cover these first.