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In India, the importance of tax planning cannot be overstated for high net-worth individuals (HNIs). With a complex tax structure and regulations that change as frequently as the weather, it’s imperative for HNIs to adopt effective tax planning strategies.
In 2022, India was home to approximately 7.9 lakh HNIs, individuals with assets worth over $1 million. This number is projected to skyrocket to 16.5 lakh by 2027, marking a staggering 107% increase.
With their substantial wealth, these HNIs face the challenge of navigating the intricate tax landscape. By exercising prudent financial management, they have the potential to not only reduce their tax liabilities but also discover opportunities for wealth accumulation.
The purpose of this article is to clarify the intricate aspects of tax management for affluent individuals in India. It intends to offer essential guidance on how to reduce tax for HNI customers.
Understanding high-net-worth individuals
High net-worth individuals (HNIs) are defined within the financial services sector as persons who possess an investable amount of around ₹5 crore. Those who fall below this benchmark are considered retail investors, with their classification determined by their overall net worth in the realm of finance.
There are different categories of HNIs based on the value of their liquid assets:
- High-net-worth individuals (HNWIs): Investors with liquid assets valued with a minimum ₹5 crores.
- Very-high-net-worth individuals (VHNWIs): Investors with liquid assets valued between ₹5 crore and ₹25 crore.
- Ultra-high-net-worth individuals (UHNWIs): Investors with more than ₹25 crore in liquid assets.
Liquid assets refer to possessions that can be swiftly and effortlessly transformed into cash.
How are HNIs taxed in India?
A progressive tax structure is designed such that the tax percentage escalates with rising taxable earnings. It applies a reduced tax rate to individuals with modest incomes and a greater rate to those earning more. This system typically involves the establishment of tax brackets, which categorise taxpayers based on their income levels.
The underlying principle of a progressive tax is to alleviate the relative financial strain on lower-income individuals, which would be aggravated by a uniform tax rate. HNIs fall under the last tax slab and are charged 30% tax for any income above ₹15 lakhs.
For HNIs income tax rates also include different income tax slabs, surcharges, and cess. Currently, these are the surcharge rate for a total income of above ₹5 crores is 25%. Alongside this, incomes are also subject to an education cess of 4%.
Tax optimisation strategies for HNIs
Limited Liability Partnerships (LLPs)
- Lower effective tax rate: The tax rate for Limited Liability Partnerships (LLPs) stands at approximately 34.94%, which is notably less than the 42.74% effective tax rate that HNIs are subject to.
- Tax-exempt distributions: Earnings allocated to partners from an LLP are not subject to taxation, making it a financially advantageous method for partners to receive their profits.
- Cost savings: LLPs provide HNIs with cost efficiencies in regulatory compliance, paperwork, and administrative processes, which can lead to substantial savings.
- FDI norms relaxation: FDI regulations for LLPs have been softened over time, now enabling non-resident investors to fully participate in sectors open to 100% FDI, thus improving investment prospects for HNIs.
Hindu Undivided Family (HUF)
- Separate entity: HUF is considered a distinct legal entity for tax purposes, much like an individual, which provides an extra opportunity for tax planning.
- Total deductions: HUFs are eligible for tax deductions under Section 80C just like individual taxpayers, which can lead to a decrease in their taxable income.
- Income splitting: When an HNI moves assets that produce income to an HUF, it can distribute the income among the family, leading to a lower combined tax obligation.
- Asset transfer: Property allocated to members from a HUF during its division is not subject to tax, offering an efficient method for dispersing assets.
Relocating to GIFT City or low-tax countries:
- GIFT City benefits: HNIs have the option to relocate their family offices to GIFT City, an Indian special economic zone, where they can benefit from a decade-long income tax holiday and more flexible rules for securing capital and making global investments.
- Low-tax jurisdictions: HNIs can lower their total tax payments and enhance their investment options by relocating to nations that have minimal or no personal income taxes.
- Global trend: Many HNIs are opting to move their residences, with Dubai and Singapore being favoured choices, to improve their tax situations and refine their investment approaches.
Other methods
- Angel investing: Investments in startups may qualify for deductions under Section 54GB, potentially resulting in substantial tax savings.
- Philanthropic trusts: Creating philanthropic trusts can lead to tax deductions for donations made, serving charitable purposes while also optimizing tax benefits.
- Infrastructure bonds: Allocating funds to such bonds could yield favourable interest rates and tax incentives, possibly leading to better overall returns than those from taxable options like fixed deposits.
Bottomline
For HNIs, tax planning is not just a prudent financial strategy but a necessity in navigating the complex tax landscape of the country.
By adopting proactive tax planning strategies and leveraging the available investment options, HNIs in India can optimise their tax efficiency, mitigate financial risks, and pave the way for long-term wealth accumulation.
FAQs
High Net-worth Individuals (HNIs) in India enjoy several benefits. They have access to personalised services, complex financial instruments, and higher leverage in stock market trading, which can lead to higher returns. They also enjoy reduced fees, special rates, and access to exclusive events. Furthermore, HNIs are a crucial part of the Indian financial markets, with a portion of all Initial Public Offerings (IPOs) dedicated to them. These privileges cater to their unique financial needs and investment goals.
The choice between tax methods depends on individual circumstances. The new tax regime, introduced in 2020, offers lower tax rates but fewer deductions. It’s beneficial for those with fewer deductions and exemptions. The old regime, with its various deductions, might be better for those with significant exemptions. It’s advisable to calculate tax liability under both regimes before deciding. Ultimately, the best method is the one that minimises your tax liability.
Yes, you can get a Tax Deducted at Source (TDS) refund on your salary. If your taxable income is less than the basic exemption limit, you can avoid TDS on your salary by submitting Form 13 to your jurisdictional Income Tax Officer. If the TDS deducted by your employer is more than your actual tax liability for the fiscal year, you can claim a refund by filing your Income Tax Returns.
Choosing between Fixed Deposits (FDs) and Public Provident Fund (PPF) depends on your financial goals, risk appetite, and investment horizon. FDs offer more liquidity and are suitable for short-term goals. They provide guaranteed returns unaffected by market fluctuations. PPF, a long-term investment, offers tax benefits and is backed by the government, making it virtually risk-free. It’s ideal for individuals seeking long-term growth with tax benefits, like retirement planning.
Tax Deducted at Source (TDS) is calculated on the gross salary rather than the Cost to Company (CTC). Gross salary includes basic pay plus allowances, while CTC encompasses gross salary and additional benefits. Employers calculate TDS based on the estimated tax liability of the employee for the financial year, divided by the number of months of employment.
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