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    Tax Planning in India for High Net-Worth Individuals

    • 5 min read
    • Last Modified Date: March 20, 2024
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    If you are a HNI, tax planning is an essential part of wealth management. Effective tax strategies are essential if you want to hold onto and increase your wealth. You must maximise your tax liability at the same time. Even though this may seem complicated, you can easily overcome the task if you have the right direction and assistance from tax planning professionals.

    The number of high-net-worth individuals (HNIs) in India is expected to increase to 1.65 million within the next five years, according to the most recent reports. These people frequently have significant wealth and specific tax planning requirements, so it stands to reason that one of their frequent queries is “How can an HNI save taxes?”

    Given that the highest income tax bracket in India is currently 30%, HNIs must look into legal options to reduce their tax liability and implement sound tax planning strategies.

    Let’s explore a few key topics in this guide, such as how HNIs are taxed in India, how to save taxes for HNIs, What is the tax rate in India for wealthy individuals?

    Understanding High-Net-Worth Individuals

    Before we get started, let’s clarify who precisely qualifies as an HNI. An HNI is anyone who has liquid assets valued at $1 million or more, though there is no set threshold. Money held in banks, stocks, bonds, and mutual funds are examples of liquid assets. But keep in mind that since they are not liquid assets, things like primary residences and collectibles are not included.

    How are HNIs Taxed in India

    India has a progressive tax system, meaning that tax rates increase with income levels. Depending on how long they have been in India, High Net Worth Individuals (HNIs) are categorised as either residents or non-residents. 

    While non-residents are only subject to taxes on income received within India, residents are taxed on their entire worldwide income. As a result, HNIs have to pay extra taxes like cess and surcharges. HNI tax rates consist of several income tax slabs, cessations, and surcharges.

    Income RangeTax Rate
    Up to Rs. 3,00,000NIL
    Rs. 3,00,000 to 6,00,0005%
    Rs. 9,00,000 to 12,00,00015%
    Rs. 12,00,000 to 15,00,00020%
    Above Rs.15,00,00030%

    Additionally, there is a surcharge of:

    • 10% for income between Rs. 50 lakhs and Rs. 1 crore
    • 15% for income between Rs. 1 crore and Rs. 2 crores
    • 25% for income exceeding Rs. 2 crores

    All incomes are also subject to an education cess of 4%.

    Investment Options for High Net Worth Individuals (HNIs) to Minimize Tax Liability

    To help HNIs minimize their tax liability, here are some investment avenues to consider:

    Real estate structured debts: Structured debt backed by real estate is a financial product that presents fixed-income prospects by using real estate assets as collateral. These investment instruments enable investors to participate in the real estate market without direct property ownership or management responsibilities. Furthermore, investors can benefit from potential tax savings of up to Rs. 50k while investing through alternate investment platforms like Assetmonk.

    Equity-Linked Saving Schemes (ELSS): ELSS mutual funds offer potential returns along with tax benefits. With a lock-in period of three years, HNIs can avail of tax deductions under Section 80C of the Income Tax Act.

    National Pension Scheme (NPS): NPS provides tax benefits and is focused on long-term retirement planning. HNIs can contribute to NPS and claim deductions under Section 80CCD(1B) in addition to those available under Section 80C.

    Unit Linked Insurance Plans (ULIPs): ULIPs combine insurance coverage with investment opportunities. HNIs can invest in ULIPs and enjoy tax benefits under Section 80C on the premiums paid.

    Tax-Saving Fixed Deposits (FDs): HNIs can invest in tax-saving fixed deposits offered by banks. These FDs have a lock-in period of five years and provide tax benefits under Section 80C.

    Public Provident Fund (PPF): PPF is a long-term investment option with tax benefits. HNIs can contribute to PPF and claim deductions under Section 80C. The interest and maturity amount are exempt from tax.

    Furthermore, HNIs can explore various deductions and exemptions to reduce their tax liability, such as:

    • House Rent Allowance (HRA) deductions
    • Leave Travel Allowance (LTA) exemptions
    • Deductions for medical expenses under Section 80D
    • Deductions under Section 80C for investments and expenses
    • Deductions for donations made to charitable institutions under Section 80G

    Strategies for Capital Gains Tax Planning for High Net Worth Individuals (HNIs)

    Capital gains tax planning is essential for HNIs in India to minimize their tax liability when selling assets. Here are some strategies to consider for capital gains tax planning:

    Indexation Benefit: HNIs can take advantage of the indexation benefit by adjusting the acquisition cost of assets for inflation. This adjustment is based on the cost inflation index (CII) provided by the government, which helps lower the capital gains.

    Exemptions and Deductions: HNIs should explore exemptions and deductions available for specific types of investments. For instance, investing in specified bonds like Capital Gain Bonds issued by NHAI or REC can provide an exemption from capital gains tax.

    Capital Loss Set-Off: HNIs can offset capital losses against capital gains to reduce their overall tax liability. Capital losses can be carried forward for up to 8 assessment years and utilized to offset future capital gains.

    Tax-Advantaged Accounts: HNIs may consider investing in tax-advantaged accounts such as the Equity Linked Savings Scheme (ELSS) or retirement accounts like the National Pension Scheme (NPS) to enjoy tax benefits and potentially reduce their capital gains tax liability.

    In addition, HNIs can reinvest their capital gains into the following options:

    54EC Bonds: HNIs can invest their capital gains in specified bonds issued by government entities under Section 54EC of the Income Tax Act. These bonds come with a lock-in period of five years and provide tax exemptions on the reinvested capital gains.

    Startups and Venture Capital Funds: Investments in eligible startups under the Startup India initiative can offer tax benefits under Section 54GB of the Income Tax Act.

    Tax-Saving Instruments: HNIs can invest their capital gains in tax-saving instruments such as the Public Provident Fund (PPF), National Savings Certificates (NSC), or tax-saving fixed deposits. These instruments provide tax benefits under Section 80C of the Income Tax Act, allowing HNIs to defer taxes on the reinvested amount while earning returns.

    Implementing these strategies can help HNIs optimize their capital gains tax planning and reduce their tax liability when selling assets. However, it is recommended that HNIs consult with a tax professional for personalized advice based on their specific financial circumstances.

    Considerations for High Net Worth Individuals (HNIs)

    Resident HNIs who earn income outside of India are required to pay taxes in India on their foreign income, as India taxes the global income of its residents. This can create conflicts between countries regarding which country has the right to collect the tax. To address this issue, the Double Taxation Avoidance Agreement (DTAA) comes into play.

    Essentially, the DTAA is a treaty signed between India and another country to prevent the double taxation of income.

    Importance of the DTAA:

    The DTAA ensures that HNIs are not taxed twice on the same income, once in a foreign country and again in India.

    It provides clarity on tax residency, the allocation of taxing rights, and mechanisms for resolving tax disputes between countries.

    Reporting Foreign Assets:

    HNIs are required to disclose their foreign assets and the income they earn from those assets to the Indian tax authorities.

    Compliance Requirements:

    HNIs must meet various reporting requirements, including filing the Foreign Assets and Liabilities Information (FAL) form, obtaining a Tax Residency Certificate (TRC), and providing Foreign Tax Credit (FTC) details.

    They must also keep proper documentation, such as bank statements, contracts, and tax-related documents, to support their foreign income and tax position.

    Recent Updates and Future Outlook

    The latest budget in India has significant implications for High Net Worth Individuals (HNIs). The budget includes measures that impact HNIs, such as reducing the maximum surcharge from 37% to 25%, thereby lowering the maximum tax rate to 39% instead of around 43%

    Additionally, there are changes related to taxing the employer’s contribution to the provident fund and National Pension System, capping the adjustment of loss from house property against other income, and taxing interest on an employee’s own contribution to PF exceeding Rs 2.5 lakh

    Furthermore, the budget introduces restrictions on tax benefits for HNIs, such as taxing capital gains on investments in residential houses and market-linked debentures as short-term capital gains at applicable tax rates

    These changes may impact high-end residential real estate, especially in metro cities. Despite these restrictions, the reduction in the highest surcharge on personal income tax from 37% to 25% is seen as a positive step that could help limit the flight of HNIs from the country to protect their income

    Bottom Line

    In conclusion, effective tax planning is crucial for High Net-Worth Individuals (HNIs) in India to optimize their tax liabilities and ensure compliance with the tax regulations. By understanding special considerations such as the Double Taxation Avoidance Agreement (DTAA), foreign asset reporting, and compliance requirements, HNIs can strategically manage their tax obligations. Staying informed about recent updates and future outlooks in tax laws will further empower HNIs to make informed decisions and maximize their financial outcomes.

    Assetmonk recognizes that our investors have a variety of investment options in addition to real estate. Only outperforming real estate assets will make it onto our list after our professional asset management team compares them to other similar financial instruments, ensuring that investors receive higher returns as well as consistent monthly income. Only assets that meet our high-potential, secure-asset criteria will be accepted onto our platform.

    Our primary expertise lies in offering individualized guidance and carefully curated fixed-income investment opportunities supported by real estate assets. We remain dedicated to our passion for guiding investors through this transformative journey and helping new and veteran investors realize the full potential of alternative investment in commercial real estate.

    FAQs

    Q1. What are some key considerations for tax planning for HNIs in India?

    A. HNIs should consider factors such as the Double Taxation Avoidance Agreement (DTAA) to avoid double taxation, foreign asset reporting requirements, compliance obligations, recent updates in tax laws, and future outlooks. These considerations help HNIs assess their tax residency, understand their tax obligations, and identify opportunities for tax optimization.

    Q2. How does the DTAA play a role in tax planning for HNIs in India?

    A. The DTAA is a treaty signed between India and another country to prevent the double taxation of income. For HNIs, it ensures that they are not taxed twice on the same income, once in a foreign country and again in India. The DTAA provides clarity on tax residency, the allocation of taxing rights, and mechanisms for resolving tax disputes between countries, thereby aiding in effective tax planning for HNIs.

    Q3. What are the compliance obligations for HNIs in tax planning in India?

    A: HNIs need to comply with various reporting requirements, including filing the Foreign Assets and Liabilities Information (FAL) form, obtaining a Tax Residency Certificate (TRC), and providing details of Foreign Tax Credit (FTC). Additionally, maintaining proper documentation, such as bank statements, contracts, and tax-related documents, is essential to support their foreign income and tax position.

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