Tax Strategies for HNI Investors in India

Planning and paying their taxes seems to be a constant challenge for High Net Income (HNI) or High Networth (HNW) customers, as they're often called. In this post, we will look at a few tax strategies that could be worth the HNI's consideration –

Creation of a Hindu Undivided Family (HUF)

A HUF consisting of a Karta (manager) and a minimum of two coparceners is a legal entity separate from an individual and enjoys the benefits of deductions on it's income. You can try transferring asset(s) / property(ies) to the HUF and claiming deduction thereon.

Creation of a Limited Liability Partnership (LLP)

The effective tax rate on an LLP works out to about 35% vis-a-vis ~43% that could be applicable to HNIs. Moreover, distribution of income from the LLP to its partners does not attract taxes like Dividend Distribution Tax (DDT). This makes an LLP an effective tax saving structure, if planned well.

Creation of Trusts

Trusts are structures that offer a number of benefits relating to asset protection, to ensure smooth succession planning, protection of family businesses from third-party entry, relief from the probate process etc.

Trusts can also contribute to tax planning. In India, contribution of property from a family member to a trust that has been created for the benefit of relations is tax exempt. Also, distribution of assets or income from the trust to its beneficiaries under a private family trust will not attract any tax liability - either in the interim period or at the time of the dissolution of trust.

Residential property purchase through home loans

Purchase of residential property through a home loan will allow a HNI to claim deduction under Section 24. The maximum deduction allowed for a self-occupied property is?2,00,000 and in case of a person having more than 1 house property then the deemed rental provision will allow full set off of interest against the market rental of that property. Also, standard deduction at 30 per cent will still be available. This can result in considerable tax savings.

Investments in debt funds / Fixed Maturity Plans (FMP)

Long-term capital gains on debt funds will kick in post holding of 3 years. The income / gains from such funds can be taxed at 20 percent after allowing benefit of indexation. HNIs can consider these investments over Fixed Deposits offered by banks.

Deposits in Non-Resident External (NRE), Resident Foreign Currency (RFC) and Foreign Currency Non-Resident (FCNR) accounts

The interest earned on deposits made in NRE, RFC and FCNR accounts by NRI HNIs is exempt from tax but only as long as you maintain your NRI status.

Moving abroad

Moving your residence to a country/jurisdiction with low taxes especially on income can also be considered but only after comprehensive planning and only if it suits your overall life context. Moreover, unlike India some of these jurisdictions may impose estate taxes which would entail further tax and succession planning.

A word of caution:

• As a HNI investor/individual you may be faced with multiple challenges on the tax front especially when you have diverse and/or international sources of income.
• The above strategies have been outlined/listed more as an easy reference for you to discuss with your personal wealth consultant rather than as specific strategies for your context.
• We strongly suggest that you go with the advice given by your financial advisor and in case you don't have one to start engaging with an experienced, well-qualified and well-referenced wealth office advisor.

I'd like to introduce myself as Suresh Kumar. I am a seasoned financial advisor with experience managing unique financial planning projects from beginning to end.