1. Chapter-XII of the Discussion Paper on the Direct Taxes Code (DTC) deals with tax incentives for savings. It proposes the "Exempt-Exempt-Taxation" (EET) method of taxation for savings. Under this method, 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).

1.1 Based on the EET principle, the Code provides for deduction in respect of aggregate contributions upto a limit of three hundred thousand rupees (both by the employee and the employer) to any account maintained with any permitted savings intermediary, during the financial year. This account will have to be maintained with any permitted savings intermediary in accordance with the scheme framed and prescribed by the Central Government. The permitted savings intermediaries will be approved provident funds, approved superannuation funds, life insurer and New Pension System Trust. The accretions to the deposits will remain untaxed till such time as they are allowed to accumulate in the account.Any withdrawal made, or amount received, under whatever circumstances, from this account will be included in the income of the assessee under the head 'income from residuary sources', in the year of such withdrawal or receipt. It will accordingly be subject to tax at the applicable personal marginal rate of tax.

1.2 Taxation on EET basis is proposed to be prospective. The DTC provides that the withdrawal of any amount of accumulated balance as on the 31st day of March, 2011 in the account of the individual in a Government Provident Fund (GPF), Public Provident Fund (PPF), Recognised Provident Funds (RPFs) and the Employees Provident Fund (EPF) will not be subject to tax. Therefore, only new contributions as well as accretions on or after the commencement of the DTC, will be subject to the EET method of taxation.

1.3 The permitted savings intermediaries would be approved by the Pension Fund Regulatory and Development Authority (PFRDA). These intermediaries will, in turn, invest the amounts deposited with them in government securities, term deposits of banks, unit-linked insurance plans, annuity plans, bonds and securities of public sector companies, banks and financial institutions, bonds of other companies enjoying prescribed investment grade rating, equity linked schemes of mutual funds, debt oriented mutual funds, equity and debt instruments. The choice of instruments will, in some schemes, be with the investor and in some others with the trustees of the schemes. The pattern of investment by the latter will be as prescribed. The rollover of any amount received, or withdrawn, from one account with the permitted savings intermediary to any other account with the same or any other permitted savings intermediary will not be treated as withdrawal and, accordingly, will not be subject to tax.

2. A large number of representations have been made with regard to the proposed EET system. It has been stated that most countries that follow the EET method of taxation of savings also have a social security system in place for all their citizens. The EET savings accounts which operate for individuals in these countries are over and above the mandatory social service payments received by them. It has been represented that in India, in the absence of a universal social security system, the proposed EET method of taxation of permitted savings would be harsh. Tax payers require some flexibility in making withdrawals in lump sum without being subjected to tax. People may need lump sum funds on retirement for various family obligations. Requests have therefore been made for continuation of Exempt Exempt Exempt (EEE) method of tax treatment of investments. Alternatively, the application of EET should be restricted to new savings instruments after the date from which the DTC comes into effect, and it should not apply to existing saving instruments.

3. Universal social security benefits for tax payers may not be feasible in the near future. Also, switching over to a complete EET method of taxation for all savings instruments would entail many administrative, logistical and technological challenges. It would require a vast network of permitted savings intermediaries, a central record keeping authority and a central agency to service around more than
three crore accounts and deduct tax at the time of withdrawals. The segregation of taxable and non-taxable amounts at the time of withdrawal and rollover from one account to another would introduce complexities and create practical difficulties.

3.1 Therefore, as of now, it is proposed to provide the EEE method of taxation for Government Provident Fund (GPF), Public Provident Fund (PPF) and Recognised Provident Funds (RPFs) and the pension scheme administered by Pension Fund Regulatory and Development Authority. Approved pure life insurance products and annuity schemes will also be subject to EEE method of tax treatment. In order to achieve the objective of long term savings, the rules for contribution as well as withdrawal will be harmonised and made uniform so that such savings are actually made and utilised by the taxpayer for the long term. Investments made, before the date of commencement of the DTC, in instruments which enjoy EEE method of taxation under the current law, would continue to be eligible for EEE method of tax treatment for the full duration of the financial instrument.

EET taxation of retirement savings proposed, but core provident funds and approved life and annuity products retain EEE treatment. The Code proposes an Exempt Exempt Taxation (EET) regime where specified contributions are deductible, accumulations remain exempt while invested, and withdrawals are taxed at the individual marginal rate; rollovers between permitted accounts will not be treated as withdrawals. Taxation on an EET basis is prospective with existing balances in certain provident funds preserved; however, Exempt Exempt Exempt (EEE) treatment will be retained for core provident funds, specified pension schemes, approved life insurance products and annuities, and pre existing EEE investments will continue to enjoy EEE treatment.