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.