High-net-worth individuals in India can use effective tax planning for high-net-worth individuals. Learn about HUFs, NRI status, estate tax, and more for optimised financial outcomes.
Taxes are crucial to any economy, and India is no exception. As a Tax Planning for High-Net-Worth (HNWI), your tax liabilities are likely substantial, given your income levels and assets. However, careful tax planning can minimise your tax liability and optimise your financial outcomes.
In this article, we will explore the various tax planning strategies HNWIs in India can use to manage their tax liabilities effectively.
Understanding the Tax Landscape for HNWIs in India
Before delving into tax planning strategies, it is essential to understand the tax landscape for HNWIs in India. In India, HNWIs are classified as individuals with an annual income exceeding ₹50 lakhs or a net worth of over ₹5 crores. HNWIs are taxed under the Income Tax Act, 1961, which prescribes various tax rates based on the taxpayer’s income level.
For HNWIs, the tax rates are higher than those for regular taxpayers. For instance, HNWIs are subject to a surcharge of 10% on their tax liability if their taxable income exceeds ₹50 lakhs but is less than ₹1 crore. If their taxable income exceeds ₹1 crore, the surcharge is increased to 15%.
Given the higher tax rates and surcharges, HNWIs need to proactively plan their tax to minimise their tax liability. Here are some effective tax planning strategies that HNWIs can adopt.
Invest in Tax-Saving Instruments
One of the most popular tax planning strategies for HNWIs is investing in tax-saving instruments. Under Section 80C of the Income Tax Act, taxpayers can claim deductions up to ₹1.5 lakhs on their taxable income by investing in tax-saving instruments such as Public Provident Fund (PPF), National Savings Certificate (NSC), Equity-Linked Saving Scheme (ELSS), etc.
HNWIs can leverage these tax-saving instruments to reduce their tax liability by investing in instruments that offer higher returns while offering tax benefits. For instance, ELSS mutual funds offer potential returns of up to 15% while offering tax deductions under Section 80C.
Maximise Deductions Under Section 80D
Apart from Section 80C, HNWIs can also claim tax deductions under Section 80D of the Income Tax Act by investing in health insurance policies. Under Section 80D, taxpayers can claim deductions up to ₹25,000 on health insurance premiums paid for themselves, their spouse, and dependent children. If the taxpayer’s parents are senior citizens, they can claim additional deductions up to ₹50,000.
By investing in health insurance policies, HNWIs can reduce their tax liability and secure themselves and their families against unforeseen medical expenses.
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Leverage Capital Gains Tax Exemptions
Capital gains tax is applicable when an individual sells a capital asset such as property, stocks, or bonds at a profit. However, the ITR exempts capital gains tax under certain circumstances.
For instance, under Section 54 of the Income Tax Act, taxpayers can claim long-term capital gains tax exemptions if they invest the proceeds in buying or constructing a residential property. Similarly, under Section 54EC, taxpayers can claim exemptions on long-term capital gains tax by investing the proceeds in specified bonds issued by the government or designated financial institutions.
HNWIs can leverage these capital gains tax exemptions to reduce their tax liability by carefully planning their investments and asset disposals.
Explore the Benefits of HUFs
Another effective tax planning strategy for HNWIs is setting up a Hindu Undivided Family (HUF). Under the Income Tax Act, a HUF is treated as a separate entity from its members and can avail tax benefits and deductions independently.
HNWIs can set up a HUF and transfer their assets to the HUF, which can then be managed by the Karta (head of the HUF). The income generated by the assets held in the HUF can be taxed separately, thereby reducing the family’s overall tax liability.
Moreover, HUFs can also claim tax deductions under Section 80C and Section 80D, similar to individual taxpayers, which further reduces the tax liability.
Explore Tax Benefits for NRI Status
If you are an Indian HNWI living abroad, you can explore the tax benefits available for Non-Resident Indians (NRIs) under the Income Tax Act. NRIs are taxed only on their income generated in India, and their foreign income is not taxed in India.
Moreover, NRIs can claim deductions under Section 80C and Section 80D for investments made in India. NRIs can also avail of long-term capital gains tax exemptions by investing in specified bonds issued by the government or designated financial institutions.
By exploring the tax benefits available for NRIs, HNWIs living abroad can reduce their tax liability in India.
Plan for Estate Tax
Another critical aspect of tax planning for HNWIs is planning for the estate tax, a tax levied on the value of assets passed on to heirs after the individual’s death. India does not currently have a specific estate tax, but the government has proposed an inheritance tax in the past.
HNWIs can plan for estate tax by setting up a trust, which can be used to transfer assets to their heirs. Trusts can also be used to ensure that the assets are managed and distributed according to the HNWI’s wishes, even after their death.
Moreover, setting up a trust can also provide tax benefits, as income generated by the assets held in the trust is taxed separately from the HNWI’s income, thereby reducing the overall tax liability.
Conclusion
Tax planning is crucial to managing the financial outcomes for HNWIs in India. By leveraging the various tax-saving instruments, deductions, exemptions, and benefits available under the Income Tax Act, Tax planning for high-net-worth can effectively minimise their tax liability. Moreover, by exploring the benefits of HUFs, NRI status, and planning for the estate tax, HNWIs can optimise their financial outcomes, secure their family’s future, and ensure that their assets are managed and distributed according to their wishes.
Therefore, HNWIs in India must seek the advice of a professional tax consultant to develop a comprehensive tax planning strategy that aligns with their financial goals and ensures compliance with the Income Tax Act.
Vakilsearch, India’s leading legal services provider, can help tax planning for high-net-worth (HNWIs) with their tax planning needs. Vakilsearch’s team of experienced tax consultants can provide personalised advice and create a comprehensive tax planning strategy that aligns with an HNWI’s financial goals. Contact Vakilsearch today for expert tax planning advice and personalised solutions catering to your needs.
Frequently Asked Questions
How tax planning helps to reduce tax liability?
Tax planning involves strategic management of financial affairs to minimise tax liabilities within the legal framework. Methods include optimising deductions, credits, and exemptions, timing income and expenses, and investing in tax-efficient avenues like retirement accounts and charitable donations.
What is tax planning for high net worth individuals in India?
For high net worth individuals (HNIs) in India, tax planning focuses on utilising sophisticated strategies to minimise tax burdens while maximising wealth preservation and growth. This includes leveraging exemptions, deductions under Sections 80C to 80U, capital gains optimisation, and exploring tax-efficient investment options such as equity-linked savings schemes (ELSS), unit-linked insurance plans (ULIPs), and offshore investments.
How can I save my tax liability?
To save tax liability, individuals can utilise various strategies such as investing in tax-saving instruments like Public Provident Fund (PPF), Equity Linked Savings Schemes (ELSS), and National Pension System (NPS). Additionally, availing deductions under Section 80C for investments in Provident Fund (PF), life insurance premiums, and repayment of home loan principal can significantly reduce taxable income.
What is meant by high-net-worth individuals?
High-net-worth individuals (HNWIs) are individuals with substantial wealth and financial assets, typically exceeding a specified threshold. They often have diversified investment portfolios, multiple income streams, and complex financial needs that require specialised financial planning and management.
What are the different types of high-net-worth individuals?
Different types of high-net-worth individuals include ultra-high-net-worth individuals (UHNWIs) with extensive assets exceeding millions or billions. Affluent individuals possess significant but relatively smaller wealth compared to UHNWIs. Both categories require tailored financial strategies to manage wealth, taxes, and investments effectively.
How do high-net-worth individuals manage their money?
High-net-worth individuals manage their money through diversified investments across equities, real estate, bonds, and alternative investments. They engage wealth managers, tax advisors, and legal experts to optimize tax efficiency, preserve wealth, and achieve financial goals. Strategies include asset allocation, risk management, estate planning, and philanthropic initiatives to ensure long-term financial security and growth.
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