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No tax benefits, exit free
December, 22nd 2006

A lot of information is available about the EEE (exempt, exempt, exempt) and EET (exempt, exempt, taxed) methods of taxation. Investors may want to know the type of tax they are required to pay at various stages because the method of taxation determines the final returns earned on an investment. Many individuals feel that any change on the tax front will result in complications. Hence, they seek a simple tax route to avoid complex calculations. But first, they need to find out if such options are available in the market.

The good news is that a third system of taxation is available this is the taxed, exempt, exempt (TEE) system, which is simpler than the other methods of taxation. This system is designed for instruments that ensure that in case of a payout or when the benefit is received from an investment, the receiver does not have to worry about the tax angle. This takes care of the complications in the various investments and their tax structure.

Individuals need to closely examine the implementation of the TEE system of taxation. The first stage is the investment stage. Here, there is a change in the benefits available. Under the TEE method, no tax benefits are available on the investment.

This means that the amount invested in this stage is taxed since the benefit of a deduction or rebate is absent, the post-tax amount is invested. Out of the total income earned, a tax has to be paid, which reduces the net amount; this amount is the final investment figure. Since the tax benefit is absent in this stage itself, no benefit needs to be reversed at a later stage. The taxation of the amount at this stage is compensated at other levels, which impacts the net earnings.

The next stage is the earnings stage, where the amount invested earns a certain rate of return, which is tax-free. This means that the amount earned whether it is paid out or accrued on the investment is not subject to tax.

However, the main benefit comes in the last stage this is the stage of receipt of funds at the time of maturity of the investment. The amount is not taxed at maturity, i.e. the amount that is returned to the investor is tax-exempt. Hence, investors can earn tax-free returns on the scheme. This compensates for the absence of tax benefit in the first stage.

The TEE method of taxation is useful for investors who want to pay tax on a certain income, then invest that amount and forget about it, so that after a period of time, this can be liquidated and the money can be received without any tax hassles.

The TEE and EET methods of taxation are practiced across the world. These systems go hand in hand with each other and with various other systems as they complete the range of choices for investors.

An individual who wants tax benefits at the time of investment can postpone his/her tax implication and pay tax when he/she takes back the money under the EET system of taxation. On the other hand, an individual who wants to get over with the tax part can pay tax on income in the initial stage and then opt for the tax-free amount over the longer time frame of investment under the TEE system of taxation.

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