Strategic methods for High-Net-Worth Individual can optimise financial constraints by using effective tax planning in India.
Let’s get started to learn the methodology for advance tax planning techniques for high-net-worth individual and corporations.
Who’s High-Net-Worth Individual (HNWI/HNI)?
In terms of counting the financial wealth in the name of individual can be measured with the quantum of amounts of monies either Tangible or Intangible property or assets. High-Net-Worth Individuals (HNIs/HNWIs) are consider to be financial privileged to those persons who’s occupying the assets of over bench-mark limit as economy rises of the country.
Types of HNIs in India
| Type | High-Net-Worth Individuals (HNIs) | Very High Net Worth Individuals (VHNIs) | Ultra High Net Worth Individuals (UHNWIs) |
| Net-Worth
(investible assets) |
INR 5 Cr. | INR 25 Cr. | INR 25 Cr. Above |
The Securities and Exchange Board of India (SEBI) has classified Non-Institutional Investors-NIIs (HNIs) into two different categories based on the amount they are willing to invest for the purpose of being investment in Initial Public Offerings (IPO).
The two different types of NIIs are:
- Small NII: Investment of more than Rs.2 Lakhs to Rs.10 Lakhs.
- Big NII: Investment of more than Rs.10 Lakhs
High Net Worth Individuals are subject to a surcharge of 10% on their tax liability if their taxable income exceeds ₹50 lakhs but is less than ₹1 crore. In the provisions of Income Tax Act, 1961, the surcharges are different for differential level of income.
Advanced tax planning for high-net-worth individuals (HNWIs) and corporations in India involves strategies that can optimize tax liabilities while ensuring compliance with the law.
- Private Trusts and Estate Planning
Private Trusts: HNWIs can create private trusts to manage and distribute wealth, helping to minimize inheritance tax and ensuring efficient transfer of wealth to heirs. Trusts can also protect assets from creditors and litigation.
Gifting Strategy: Utilizing the gifting provision under Section 56(2)(x) of the Income Tax Act, 1961 HNWIs can gift assets to family members, potentially reducing their overall taxable income.
- Investment in Tax-Efficient Instruments
Equity-Linked Savings Scheme (ELSS): Investments in ELSS provide tax benefits under Section 80C with the added advantage of potential capital appreciation.
Public Provident Fund (PPF): Although there is an investment cap, PPF is a tax-exempt instrument that offers long-term benefits.
Tax-Free Bonds: These bonds offer tax-free interest income, making them an attractive option for HNWIs looking to optimize their tax liability.
- International Tax Planning
Double Taxation Avoidance Agreement (DTAA): For HNWIs with global income, leveraging DTAA can help avoid double taxation, ensuring tax is paid only once on the same income in either country.
Offshore Trusts: Establishing trusts in jurisdictions with favourable tax treaties with India can help defer taxes on offshore income.
- Business Restructuring for Corporations
Holding Company Structure: Corporations can benefit from creating a holding company structure, where profits can be consolidated and strategically allocated to minimize tax burdens.
Transfer Pricing: Proper transfer pricing documentation and adherence to the arm’s length principle can help corporations manage cross-border transactions efficiently, reducing the risk of tax disputes.
- Capital Gains Management
Strategic Sale of Assets: Timing the sale of assets to coincide with favourable tax conditions (such as lower capital gains tax rates) can reduce tax liabilities.
Section 54EC Bonds: Investing long-term capital gains into specified bonds under Section 54EC can provide exemption from capital gains tax.
- Charitable Contributions
Section 80G Donations: Donations to approved charitable institutions can reduce taxable income under Section 80G.
Corporate Social Responsibility (CSR): Corporations can align their CSR activities with tax planning strategies, ensuring that their contributions are tax-deductible.
- Employee Stock Option Plans (ESOPs)
Tax-Efficient ESOPs: Structuring ESOPs to optimize tax implications for both the company and its employees can be a significant tax planning tool, particularly in start-up ecosystems.
- Succession Planning
Will and Succession Planning: For HNWIs, clear and tax-efficient succession planning, including the use of wills, can prevent disputes and ensure the efficient transfer of wealth.
- Tax-Loss Harvesting
Offsetting Gains with Losses: By strategically selling investments that have declined in value, HNWIs and corporations can offset capital gains with losses, thus reducing overall tax liability.
- Intra-Family Loans
Interest-Free or Low-Interest Loans: Intra-family loans at low or no interest can be a tax-efficient way to transfer wealth, particularly when structured to avoid gift tax implications.
- Tax-Efficient Remuneration Structures
Split Compensation Packages: For HNWIs who are also corporate executives, structuring compensation with a mix of salary, bonuses, stock options, and perquisites can optimize tax efficiency.
- Advance Ruling and Dispute Resolution
Advance Ruling Mechanism: Corporations and HNWIs can seek advance rulings on complex tax issues to gain certainty and avoid future disputes with tax authorities.
Settlement Commission: For corporations facing tax disputes, approaching the Settlement Commission can provide an opportunity to settle cases with reduced penalties.
- Utilizing Depreciation and Amortization
Accelerated Depreciation: Corporations can maximize tax deductions by opting for accelerated depreciation on eligible assets.
Goodwill Amortization: Amortizing goodwill, especially post-acquisition, can reduce taxable income significantly.
- Investments in Start-ups and New Ventures
Section 54GB Exemption: Investing in eligible start-ups can provide capital gains exemption under Section 54GB.
Angel Tax Exemption: HNWIs investing in start-ups may benefit from exemptions related to the angel tax provisions, reducing tax burdens on their investments.
In the field of wealth management, effective tax planning is more than just following the rules—it’s about taking advantage of chances to improve financial health and establish a lasting legacy. The main ideas presented in this article are the starting point, but achieving tax efficiency is a continuous and constantly changing process.
By partnering with FILINGPOOL, you can confidently manage changes Income Tax Return Filing In Delhi, ensuring your tax strategy protects and increases your wealth. Get in touch with us today to start creating a customized tax strategy that aligns with your unique legacy objectives. Let’s work together to create a lasting legacy for you.
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