Tax Planning for HNIs

Stocks and bonds are major assets in which a number of HNIs invest. Short term capital gains tax on listed equity and equity – oriented mutual funds has been increased to 20% from 15% in the Finance Act, 2024. Tax planning will now require managing the exit of your investments in listed equities so that your capital gains tax liability is minimized.

For instance, realizing short term capital gains tax on a stock investment may be completely offset by the higher 20% short term capital gains tax on stocks. Long term capital gains tax on stocks is just 12.5%.

HNIs tend to invest in a number of private market assets. These include assets ranging from stocks of unlisted companies to investment in venture capital firms to paintings of the likes of Van Gogh and Cezanne. Efficient tax planning is also about identifying private assets that may bring some tax savings.

To save on capital gains of any kind, you can choose to hold your assets and not sell them. You can take loans against these assets to meet your expenses. The interest that you pay on these loans may be much less than the capital gains tax that you may have to pay if you choose to monetize your assets by selling them. As an HNI you can get loans on highly favorable terms.

Expenses that you incur during the course of earning your income are tax deductible. Tax planning involves maximizing the use of these expenses so that your income tax liability is minimized. For instance, the rent of your office is a tax deductible expense. The salary that you pay to your chauffeur for your work related travel is tax deductible. Tax planning involves identifying extensively the expenses that are tax deductible and using them to the fullest.

Another important aspect of tax planning for HNIs is using the right structure for holding their assets. Structures such as Hindu Undivided Family (HUF), trusts, and limited liability partnerships are available. Choosing the right structure for keeping your assets may minimize your tax outgo.

Another important part of tax planning for HNIs is acquiring assets in overseas countries that have more favorable taxation structure. Indians can acquire assets outside India under Liberalized Remittance Scheme (LRS). This allows Indians to automatically acquire assets worth up to $250, 000 annually in foreign countries, without requiring permission from RBI. Acquiring income generating assets abroad, in countries with more favorable tax regimes may reduce your tax outgo.

Then there is charity. Donations to many charitable organizations are tax deductible under Section 80 G of Income Tax Act. These deductions can go up to 50% of the amount donated. You can choose to give your money to the cause you want to espouse instead of paying them as taxes.

For an HNI, annual tax savings through efficient tax planning can be value accretive in the medium and long term in a significant way.