I want to invest for my child that gives me decent savings and also mitigates tax obligations. What investment options are available under the EEE structure?

To secure a bright future for my child, I want to make savvy investment decisions that not only enhance their savings but also mitigate tax obligations. Are you aware of any tax-efficient investment options falling under the EEE (Exempt-Exempt-Exempt) structure and equity-linked savings schemes that provide substantial tax advantages?

Advice by Dinkar Sharma, Company Secretary and Partner, Jotwani Associates

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To secure a bright financial future for children, strategic investment decisions that optimize tax efficiency are essential. Several investment avenues in India fall under the EEE (Exempt-Exempt-Exempt) structure, offering complete tax benefits at all three stages—investment, accumulation and withdrawal.
EEE (Exempt-Exempt-Exempt) Investments

1.    Public Provident Fund (PPF): A PPF is a long-term savings instrument that offers tax-free interest and maturity proceeds, making it ideal for child savings. The contributions qualify for deduction under Section 80C of the Income Tax Act, 1961.

2.    Sukanya Samriddhi Yojana (SSY): Designed for the financial security of a girl child, SSY offers tax-free interest and maturity benefits, with contributions deductible under Section 80C.

3.    Employee Provident Fund (EPF) & Voluntary Provident Fund (VPF): While primarily for salaried individuals, these funds provide tax-free growth and withdrawals after specified conditions are met.

4.    Life Insurance Policies (Certain Plans): If structured correctly, traditional endowment and child insurance plans can also enjoy EEE benefits under Sections 10(10D) and 80C.

5. Equity-Linked Savings Schemes (ELSS): Tax-Advantaged Equity Investment

For investors looking to balance wealth creation with tax savings, Equity-Linked Savings Schemes (ELSS) provide a compelling option. ELSS funds:
•    Offer tax deduction of up to Rs 1.5 lakh under Section 80C.
•    Have a mandatory three-year lock-in period, which is the shortest among tax-saving instruments.
•    Provide exposure to equity markets, allowing for potentially high returns over the long term.
•    Unlike PPF and SSY, they do not fall under the EEE category, but long-term capital gains (LTCG) up to Rs 1 lakh per annum are tax-exempt, making them highly tax-efficient.

6. Tax savings in FY2024- 25

The deadline for tax-saving investments for this fiscal year is approaching, ending on March 31, 2025. When selecting an investment, it is important to consider factors such as lock-in periods, withdrawal conditions, taxes on interest, and maturity amounts. For individuals with high incomes, the taxability of returns is a crucial consideration. Taxable returns are combined with your income and subject to higher tax rates. Consequently, investments offering tax-free returns can significantly enhance your after-tax earnings.

In the fiscal year 2024-25, employed individuals have the option to choose between the old tax system and the new one. The old tax regime provides deductions and exemptions, while the new system features lower tax rates but fewer deductions. It is essential to compare your tax liabilities under both systems before making a decision. If the old system is more advantageous for you, it is crucial to select the appropriate tax-saving options.

7. EEE vs EET vs ETE

Under the Exempt-Exempt-Exempt (EEE) structure, all three stages of the investment are considered tax-free, including the initial contribution, the interest earned, and the final withdrawal. Notable examples of EEE investment schemes include the Public Provident Fund (PPF), Employees' Provident Fund (EPF), and Sukanya Samriddhi Yojana (SSY).

Exempt-Exempt-Taxable (EET): Under this investment scheme, both the investment amount and the interest earned remain tax-exempt. However, the amount withdrawn at the end of the investment period is subject to tax. Notable examples - National Saving Certificates (NSC VIII-Issue) and Pension Schemes

Exempt-Taxable-Exempt (ETE): In this scheme, the initial investment and the final withdrawal are exempt from tax. However, the interest earned during the investment period is taxable.

Conclusion

The Income Tax Bill, 2025, underscores the government's commitment to a more streamlined and taxpayer-friendly environment. However, the efficacy of traditional tax-efficient investment options remains unchanged. A strategic blend of EEE instruments for stability and ELSS for growth continues to be an effective approach to securing a child's financial future while optimizing tax benefits.

A well-balanced approach combining EEE investments for stability and ELSS for equity-driven growth ensures long-term financial security for children while optimising tax benefits. Parents should align these investments with their financial goals and risk appetite to maximize returns while leveraging available tax exemptions.