Tax Planning For High-Net-Worth Individuals

Tax planning is essential for managing the finances of high net-worth individuals (HNIs) in India. Given the intricate tax system and continuously changing regulations, HNIs must embrace efficient tax planning tactics.

Through prudent financial management, HNIs can reduce their tax burdens while capitalising on opportunities for wealth accumulation.

Keep reading as we learn about tax planning for high networth individuals to safeguard their assets and enhance their wealth.

Who are HNIs?

The full form of HNI is High Net Worth Individuals. An HNI in India is generally defined as an individual with investable assets over INR 5 crore, but the threshold may differ. These people are typically successful professionals, business owners, corporate executives, entrepreneurs, or wealthy inheritors.

Understanding the Tax Arena for HNIs in India

In India, a progressive tax structure is implemented, wherein higher income levels incur higher tax rates.

Before exploring tax planning for high networth individuals, it is imperative to grasp the tax framework applicable to High Net Worth Individuals (HNIs) in India. High Net Worth Individuals (HNIs) are categorised as either residents or non-residents depending on their residency status in India.

Residents are liable to pay taxes on their worldwide income, whereas non-residents are taxed solely on income earned within India’s borders. As a result, HNIs are susceptible to additional taxes such as surcharges and cess.

In India, individuals with an annual income surpassing ₹50 lakhs or possessing a net worth exceeding ₹5 crores fall under the HNI category.

HNIs are subject to taxation according to the provisions of the Income Tax Act, 1961, which stipulates varied tax rates contingent upon the taxpayer’s income bracket.

HNIs face higher tax rates compared to regular taxpayers. For instance, HNIs incur a surcharge of 10% on their tax liability if their taxable income exceeds ₹50 lakhs but remains below ₹1 crore. If their taxable income exceeds ₹1 crore, the surcharge escalates to 15%.

Considering the elevated tax rates and surcharges, HNWIs must engage in proactive tax planning endeavours to mitigate their tax obligations.

Key Components of HNI Taxation

Here is an overview of taxable income for HNIs:-

Salary Income

Salary income comprises the fundamental salary, allowances, bonuses, commissions, and additional benefits received from employment engagements.

Business Income

Business or professional income encompasses various sources such as consultancy services, freelancing activities, partnerships, proprietorships, and other entrepreneurial endeavours.

Short-term and Long-term Capital Gains

Gains from assets held for less than 24 months (36 months for immovable property) fall under this category and are considered short-term. On the other hand, gains from assets held for more than 24 months (36 months for immovable property) are categorised as long-term capital gains.

Rental Income

Additionally, taxes on income from rental properties — whether residential or commercial — are included in the taxation considerations for HNIs.

Individuals earning rental income from real estate holdings typically must disclose and fulfil tax obligations related to this source of income.

The tax assessment of rental income may entail deducting specific expenses linked to property maintenance, including property taxes, mortgage interest, repairs, and depreciation.

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Domestic and International Income

HNIs frequently maintain a global footprint and may derive income from domestic and international channels. Tax statutes in numerous nations mandate individuals to disclose and fulfil tax obligations on their global income.

Consequently, HNIs may encounter taxation on earnings acquired domestically and abroad, contingent upon the precise tax laws of their country of domicile.

It is important to note that in India, HNIs are liable to taxation on domestic and international income. Residents must pay taxes on their worldwide income, while non-residents are taxed solely on income generated within India.

Other Sources of Income

Income from sources such as dividends received by HNIs from their ownership of company shares is commonly subject to taxation.

The tax rate applied to dividends may diverge from regular income. It could fluctuate based on variables such as the nature of the dividend and the individual’s tax bracket.

Furthermore, interest accrued on bank deposits, bonds, or other fixed-income investments is typically regarded as taxable income and is subject to income tax.

Importance of Tax Planning for HNIs

It is imperative for tax planning for high networth individuals. Proactive tax strategies incur several benefits.

• Maximising Tax Savings

Proactive tax planning empowers High Net Worth Individuals (HNIs) to recognize and leverage accessible tax deductions, exemptions, and credits, thereby legally reducing their tax obligations. By strategically managing their income and investments, HNIs can alleviate their tax burdens and optimise their after-tax income.

• Optimising Investment Decisions

Tax planning is crucial in helping high individuals (HNIs) make well-informed investment choices. It enables them to select tax-efficient investment instruments and strategies while capitalising on tax-exempt or tax-deferred alternatives.

• Risk Management

Proactive tax planning enables High Net Worth Individuals (HNIs) to identify and mitigate potential tax risks effectively. By ensuring that their financial transactions and arrangements comply with tax laws, HNIs reduce the probability of audits, disputes with tax authorities, or non-compliance issues.

Investment Options for HNIs To Save Taxes

1. Equity Linked Saving Schemes

ELSS (Equity Linked Savings Scheme) is a preferred tax-saving investment avenue, offering potential returns alongside tax advantages. High Net Worth Individuals (HNIs) can opt for ELSS mutual funds, characterised by a three-year lock-in period, facilitating tax deductions under Section 80C of the Income Tax Act.

1. National Pension Scheme

The National Pension System (NPS), a long-term retirement-centric investment avenue, provides tax advantages. High Net Worth Individuals (HNIs) can contribute to NPS and avail deductions under Section 80CCD(1B), supplementing the deductions available under Section 80C.

1. Unit Linked Insurance Plans

ULIPs (Unit Linked Insurance Plans) integrate insurance coverage with investment prospects. High Net Worth Individuals (HNIs) can invest in ULIPs and capitalise on tax benefits under Section 80C, applicable to the premiums paid.

1. Tax-saving Fixed Deposits

High Net Worth Individuals (HNIs) can invest in tax-saving fixed deposits banks provide. These fixed deposits typically feature a lock-in period of five years and offer tax benefits under Section 80C of the Income Tax Act.

1. Public Provident Fund

Public Provident Fund (PPF) stands as a long-term investment avenue with associated tax benefits. High Net Worth Individuals (HNIs) can contribute to PPF and avail deductions under Section 80C of the Income Tax Act. Furthermore, the interest earned and the maturity amount from PPF investments are exempt from tax.

What are the Deductions and Exemptions for HNIs?

• House Rent Allowance

High Net Worth Individuals (HNIs) receiving House Rent Allowance (HRA) as part of their salary can seek deductions under Section 10(14) of the Income Tax Act. The deductible amount is determined as the least of the following: the actual HRA received, 50% of the salary for residents of metro cities (or 40% for non-metro cities), or the actual rent paid minus 10% of the salary.

• Leave Travel Allowance

High Net Worth Individuals (HNIs) are eligible to claim exemptions on Leave Travel Allowance (LTA) under Section 10(5) of the Income Tax Act. This exemption pertains to expenses accrued on domestic travel for the employee and their family members, subject to specific conditions and constraints.

• Medical Expenses

High Net Worth Individuals (HNIs) can claim medical expense deductions under various sections of the Income Tax Act. For instance, under Section 80D, deductions are accessible for premiums disbursed towards health insurance policies covering oneself, spouse, children, and parents.

• Section 80C

High Net Worth Individuals (HNIs) can avail deductions under Section 80C of the Income Tax Act for investments and expenses up to a maximum of Rs. 1.5 lakh. This encompasses investments in instruments like the Public Provident Fund (PPF), National Savings Certificates (NSC), Employee Provident Fund (EPF), tax-saving fixed deposits, and payment of life insurance premiums. Additionally, tuition fees for children’s education and principal repayment on home loans qualify for deductions under this section.

• Section 80G

High Net Worth Individuals (HNIs) can claim deductions for donations made to eligible charitable institutions under Section 80G of the Income Tax Act.

Conclusion

In India, initiatives to substantially improve tax planning strategies for high networth individuals are gaining momentum. HNIs can mitigate their tax burdens and enhance their wealth accumulation prospects by leveraging tax deductions and exemptions, investing in tax-efficient instruments, and maximising retirement contributions.

They can also utilise the Hindu Undivided Family (HUF) structure and family trusts, take advantage of Double Taxation Avoidance Agreements (DTAAs), implement effective estate planning strategies, and conduct regular tax assessments.

Seeking professional guidance for tax planning strategies for high networth individuals from financial advisors and tax experts is advisable to tailor these strategies to their unique circumstances and ensure adherence to relevant laws and regulations.

With meticulous planning and proactive tax management, HNIs can safeguard their assets, preserve their wealth, and realise their financial aspirations in India.

 

Frequently Asked Questions

In what ways are trusts shown to be used with the tax planning of highly appreciated individuals?

Trusts are the most crucial part of the tax planning of HNWIs; among their perks, one can access the issues of real estate protection, and the minimisation of estate gifts, and there is nothing like a probate now. While different types of trusts cover various objectives, e.g., revocable, irrevocable, and charitable trusts, clients can choose the trust that will serve them best.

Would high-net-worth individuals who plan to die know the best ways to avoid, lessen, or pay for inheritance tax?

Estate tax sheltering tactics for HNWIs could include the employment of trusts, lifetime giving, buying life insurance, and charitable planning. Hence, correctly picking this tool can help individuals eradicate the tax effect by passing on the wealth to the beneficiary or heirs.

Please advise on tax planning issues that would likely impact the operations of high-net-worth business owners.

Entrepreneurs are subject to many challenging issues, such as business form choice, succession planning, and how to dispose of the business. Entering business dealings and running business operations tax-efficiently for high-net-worth entrepreneurs can add value to their profitability and preserve wealth.

What will be the outcome of tax planning at the international level from the point of view of highly situated global investors with worldly assets?

International tax planning is crucial and, thus, is truly in use for those HNWIs who possess global assets and/or live in several jurisdictions. Tax treaties, foreign tax credits, and foreign subsidiary structures are among the many efficiency and compliance enhancement strategies used by individuals with broad exposure to tax residency issues.