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Provide an appropriate response. True or False? With tax-exempt investments, you never have to pay tax...

Provide an appropriate response.

True or False? With tax-exempt investments, you never have to pay tax on the earnings.

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Answer #1

The answer is not as easy as just a true or false. There are different types of tax exemptions:

1. tax exemption (or rebate) at the time of investment, which results in a reduction in taxable income

2. tax exemption on the income that gets accrued on an annual basis

3. tax exemption on the amount that is withdrawn on the investment's maturity

Different types of investments have different treatments for the three types of exemption mentioned above. An investment which enjoys exemption of all three types can be said never to suffer tax, else not.

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