EPF is one of the very few savings schemes that is EEE–a short form for exempt, exempt, exempt implying you save income tax at all three levels you could have been taxed: First, when you invest in the scheme the money is exempted from the taxable income of the year. Second, the interest you earn on the EEE. EET investment is not taxed.Third, the income you earn at the time of the maturity of the scheme is also 100% exempt from tax.
The only other scheme that enjoys three-level tax free passage is public provident fund (PPF), but you can’t invest more than Rs 1.5 lakh in the scheme. If peak level of income tax (30%) applies to you, your investment of Rs 1 lakh effectively means you are investing only Rs 70,000 to get the benefit of Rs 1 lakh investment. Had you not invested in the EEE scheme, Rs 30,000 would have to be paid as income tax.
National Pension System is an example of EET where your investment and interest is not taxed, but tax is imposed on maturity. Tax-free bonds are taxed according to TEE, where no exemption is granted at the time of investment, but interest and withdrawal are tax free.
