Taxes are unavoidable and so are changes in tax rates. Tax rate changes can often hurt your long-term savings prospects. Recently, calls by the banking industry for parity in tax levels of bank fixed deposits (FDs) and debt mutual funds resulted in the increase of holding period for long-term capital gains for non-equity funds from 12 months to 36 months.

Similarly, the tax was levied on ULIPs for annual contributions of more than Rs 2.5 lakh, after demands for a level playing field by mutual funds.

Revision in tax rates seem highly likely owing to fiscal stress on the government and the latter would want to bring more investment products in taxation ambit.

As is the practice worldwide, there is no tax on the death benefit of insurance policies in India as well but the government has recently imposed tax on ULIPs where the annual maturity premium is more than Rs 2.5 lakh. Experts say it would be unsurprising if even traditional plans also get added to the list in coming years. Banks continue to lobby to give favourable terms to debt funds in form of indexation benefits. Long term capital gains on all products may go up in future as capital gains are supposed to tax the rich.

While effecting tax changes grandfathering provision also comes to the rescue. The 10% Long Term Capital Gains (LTCG) on equities is only for investments made after January 31, 2018. For example, the new tax on EPF interest is limited to the amount invested over Rs 2.5 lakh per annum from April 1, 2021. Also, the amount invested in ULIPs before the date will not attract this tax. However, there have been cases when grandfathering was circumvented. For example, the definition of long-term debt fund was changed from one year to three years without the grandfathering provision. So investors who put money in one-year debt FMP was taxed. They ended up paying short-term capital gains instead of long-term capital gains.

Make most of current tax regime

Concerns over increasing in future taxes should not deter investors to make the most of the current tax regime. Money saved in taxed this year amount to money earned. Taxpayers must make use of Rs 1.5 lakh limit in 80C. For example, savings for long term goals should be done through tax savings scheme instead of normal equity schemes. The tax benefits make ELSS a much better choice while both generate the same returns. The actual ELSS returns are magnified after taking into account the tax saved.

Taxpayers should also consider putting money in FDs which give 80C benefits or small savings scheme like PPF instead of keeping cash. Similarly, investors can use the Rs 50,000 deduction under Section 80CCD (1B) for NPS. NPS tends to generate better returns owing to its low-cost structure. Additional tax benefits and returns lower other issues like like long-in period till retirement.

Also, profits upto Rs 1 lakh per annum are exempted from LTCG. So, investors should not book more than Rs 1 lakh long-term capital gains every year lest they stand to lose should the government make this tax-free again.

Defer taxes

The compounding effect of wealth makes a strong case for deferring your taxes. By limiting investments in accrual assets like FDs and mutual funds where tax is levied upon sale of units. Because there is inheritance tax in India, the tax on such assets can be saved by transferring the same to legal heirs later. However, India had inheritance tax earlier known as estate duty, the return of which cannot be ruled out.