Under the Exempt-Exempt Tax (EET) principle, the contributions towards certain savings are deductible from income (this represents the first ‘E’ under the EET method), the accumulation/accretions are exempt (free from any tax incidence) till such time as they remain invested (this represents the second ‘E’ under the EET method) and all withdrawals at any time are subject to tax at the applicable marginal rate of tax (this represents the ‘T’ under the EET method).
Significance of EET Principle
Under EET, a savings scheme would be exempt from taxation at the time of contribution, exempt again during accumulation of the corpus and taxed only on withdrawal. However, if the accumulated saving, on maturity, is ploughed back into fresh savings, the corpus would again be exempt from tax. In combination with capital gains being treated as income subject to indexation, the principle that no saving would be taxed, only the income from that asset would be charged to tax, is a rational way of taxation. It would leave more financial savings with an individual and create a self-financing social security system. Moreover, EET would make the tax-exempt limit on savings redundant. EET can apply to fresh savings. Taxation on EET basis is proposed to be prospective.