Taxes, as well as changes in tax rates, are inescapable. Changes in tax rates can wreak havoc on your long-term financial goals. Following calls from the banking industry for tax parity between bank fixed deposits (FDs) and debt mutual funds, the holding period for long-term capital gains for non-equity funds was increased from 12 to 36 months.
After mutual funds demanded an equal playing field, the tax was imposed on ULIPs with yearly contributions of more than Rs 2.5 lakh.
Due to the government's economic stress, it is quite possible that tax rates will be revised, and the latter would wish to include additional investment items in the taxing scope.
There is no tax on the death benefit of insurance policies in India, as is the case around the world, but the government has lately imposed a levy on ULIPs with annual maturity premiums of more than Rs 2.5 lakh. Experts say it's not out of the question that traditional plans may be added to the list in the future years. Banks continue to advocate for favourable terms in the form of indexation benefits for debt funds. Because capital gains are designed to be taxed on the wealthy, long-term capital gains on all products may rise in the future.
When it comes to implementing tax changes, the grandfathering provision comes to the rescue. Long Term Capital Gains (LTCG) of 10% on stocks is only applicable to investments made after January 31, 2018. From April 1, 2021, the new tax on EPF interest will be limited to amounts invested exceeding Rs 2.5 lakh per annum. Additionally, the amount invested in ULIPs before to the deadline will be exempt from this tax. There have been instances where grandfathering has been disregarded. The concept of a long-term debt fund, for example, was changed from one year to three years without grandfathering. As a result, investors who invested in a one-year debt FMP were taxed. Instead of paying long-term capital gains, they had to pay short-term capital gains.
Maximize the current tax system:
Concerns about prospective tax increases should not stop investors from taking advantage of the current tax system. This year, money saved in taxes equates to money earned. The Rs 1.5 lakh limit in 80C must be used by taxpayers. Savings for long-term purposes, for example, should be done through tax savings plans rather of traditional equity plans. While both produce the same returns, the tax benefits make ELSS a far better choice. After deducting the tax savings, the true ELSS returns are amplified.
Instead of holding cash, taxpayers should consider investing in FDs that provide 80C benefits or small savings plans like PPF. Similarly, investors can deduct Rs 50,000 from their NPS contributions under Section 80CCD (1B). Because of its low-cost structure, NPS tends to provide higher returns. Other problems, like as the long-in term till retirement, are mitigated by additional tax benefits and returns.
LTCG is also free for profits up to Rs 1 lakh per year. As a result, investors should not book more than Rs 1 lakh in long-term capital gains each year, or they risk losing money if the government reinstates the tax-free status.
Defer tax payments:
The compounding effect of wealth makes delaying taxes a strong case. By limiting investments in accrual assets such as FDs and mutual funds, which are taxed on unit sales. Because India has an inheritance tax, such assets can be transferred to legitimate heirs later to avoid paying the tax. However, India used to have an inheritance tax known as estate duty, which could be reinstated in the future.
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