How to do tax planning for high-income earners?

Introduction

With a growing economy, India is experiencing an increase in high-income earners. However, higher income also means paying higher taxes. Belonging to this income group includes a huge responsibility of managing taxes effectively for financial planning. If you find yourself in the high tax bracket, don’t worry; there are plenty of strategies that can help you manage and reduce your tax bills.

In this article, we will discuss advanced tax minimization strategies for high earners to reduce the tax burden and prepare the path for long-term financial success. So buckle up and get ready to step up for tax planning for high-income earners!

Tax for high-income earners in India

Before we go into the ninja techniques of sophisticated tax planning, let’s look at how high-income individuals are taxed in India and how  tax planning for high earners can be done. Check at the current tax slab rates for the Assessment Year 2024-25:

Here are the surcharge rates if your total income exceeds specified limits:

Note – In the Budget for the year 2023, the highest surcharge rate of 37% has been reduced to 25% under the New Tax Regime (It will be applicable from April 1st, 2023).

Also Read: Old vs. New – Which income tax regime is better for FY 2023-24?       

For what high-income earners need to pay tax?

In India, there are five major revenue components. Understand this for tax mitigation for high earners.

Income from salary

If you are a professional who earns a salary as your main source of income, this section is especially relevant to you. It includes the basic salary, allowances, annual bonuses, commissions, and other employee benefits.

Income from house property

It includes taxes on rental earnings, whether residential or commercial. HNIs (High net-worth individuals) who generate rental income from real estate properties are often required to disclose and pay taxes on such income.

The tax treatment of rental income may include deducting some property-maintenance expenses such as property taxes, repairs, depreciation, etc.

 Profits and gains from business or profession

Profits earned from any type of business or profession are taxable under this category. To calculate your profit or gross income, subtract your expenses from your total revenue.

It also includes incomes such as bonuses, salaries, and profits earned through a partnership with a business.

Income from capital gains

Capital gains tax is charged on any profit or gain resulting from the sale or transfer of a capital asset held as an investment. There are two types that you should understand for strategic tax management:

• Short-term Capital Gains (STCG): Gains on an asset held for less than 24 months (36 months for immovable property) are categorised as short-term.
• Long-term Capital Gains (LTCG): If the asset is kept for longer than 24 months (36 months for immovable property), the gains are deemed long-term.

Income from other sources

Earnings that do not fit within any of the above-mentioned income categories will fall under this head. For example, income from lottery, bank deposits, dividend income or any interest earned on bonds or fixed-income instruments.

Tax-saving techniques for high-income individuals

Now, let’s get to the fun part– different ways to do tax planning for high-earners:

1.   Investing in Tax-Saving Instruments

For wealthy tax planning, use these amazing tax-saving instruments:

ELSS (Equity Linked Savings Scheme)

Investing in ELSS mutual funds provides the combined benefit of tax reductions and long-term wealth creation. High-income individuals can invest in ELSS funds, which have the shortest lock-in period of 3 years as compared to other tax-saving instruments. They have the potential to provide the best returns among 80C investment options. It is a good way for tax-efficient wealth management.

National Pension Scheme (NPS)

It is a retirement-focused scheme that also offers you tax benefits. On top of the deduction allowed by Section 80C, you can also claim deductions under Section 80CCD(1B) and make contributions to the NPS. This can help you with income tax optimization.

Tax-saving FDs

It provides a tax deduction under Section 80C that comes with a lock-in period of 5 years. It is a great instrument for tax savings while earning interest. 

Public Provident Fund (PPF)

It is a Government-backed scheme which offers you tax benefits under Section 80C. It has a lock-in period of 15 years and falls under the Exempt- Exempt- Exempt (EEE) category. It means the invested amount, interest earned as well maturity amount are totally tax-free.

ULIPs

ULIPs combine insurance and investing opportunities. HNIs can invest in ULIPs and benefit from tax advantages under Section 80C on premium payments.

Senior Citizens Savings Scheme

It is also one of the top tax-saving investments for senior citizens under Section 80 C since it allows them to claim an SCSS tax deduction of up to Rs. 1.5 lakh on your investment.

Also read: Overview of section 80C deduction and its sub-sections in income tax

2.  Deduction on home loan interest 

Section 24 of the IT Act provides further tax advantages for residential property. If the owner or family stays in the property, homeowners can deduct up to Rs 2 lakh on home loan interest. If the property is rented out, the entire home loan interest can be deducted. This technique is quite helpful in tax planning for affluent individuals for high-earning tax deductions.

High-net-worth individuals who own more than one residential property with rental possibilities can save significantly on taxes because a standard 30% tax deduction is allowed.  

3. Charity contribution

Donations made under Section 80G are another great option for tax advantages for high-income earners. You can claim deductions ranging from 50 to 100%, depending on the type of donation you make.

It’s crucial to remember that not all donations qualify for the Section 80G deduction. Only donations given to specific funds or institutions are eligible for a deduction. Therefore, you need to confirm if the fund or organisation to which the donation has been made qualifies for a section 80G deduction. 

4. Utilising the Hindu Undivided Family (HUF) structure

The Hindu Undivided Family (HUF) structure is a distinctive tax planning technique in India. High-income earners can form a HUF to create a separate tax entity with its own PAN (Permanent Account Number) and take advantage of the tax incentives given to HUFs. 

Income made by the HUF can be distributed among family members, lowering the overall tax liability. Furthermore, HUFs, similar to individual taxpayers, can claim tax deductions under Sections 80C and 80D, further reducing their tax liability. 

Also read: How to achieve financial freedom and live your best life?/

5.  Setting up family trusts

High-income earners can set up family trusts to manage their money and provide for future generations while minimising tax consequences. In a  family trust arrangement, the trust’s assets, including residential properties, cash, bank savings, and shares, can be passed to the beneficiaries tax-free. 

In addition to maintaining family harmony, a family trust can conserve money, protect assets, and limit third-party involvement in the family business. It is a great technique for wealth preservation through tax planning.

Conclusion 

That’s it, tax warriors! The key to mastering the art of tax planning is to understand the game and take advantage of the above-mentioned strategies. With careful consideration of your income streams and tools to save taxes, you can plan your finances in advance and make tax planning a fun and efficient way to save money. For more useful insights, visit our website StockGro.