New Delhi, India – High-net-worth individuals (HNWIs) are increasingly turning to Limited Liability Partnerships (LLPs) as a strategic tax optimisation move, experts reveal. LLPs, with a distinct tax rate of 34.94% on total income, stand out from other business structures, offering a unique advantage for tax planning and reduction. The key feature of LLPs lies in the exemption of tax on profit distribution, resulting in a streamlined single layer of taxation, significantly easing the tax burden for HNIs utilising this avenue.
Illustrating the potential benefits, Lokesh Shah, a partner at IndusLaw, presents a hypothetical scenario. In contrast to the standard tax rate of 42.74% (39% under the new tax regime) for individuals in the highest tax bracket receiving dividends, an HNI holding shares through an LLP could enjoy a more favourable effective tax rate of 34.94% on dividends received.
Experts emphasise that the adoption of LLPs for tax optimisation is well within the legal boundaries set by authorities. S Sriram, a partner at Lakshmikumaran and Sridharan, highlights the lower tax rates on LLPs compared to HNIs in the maximum tax bracket. Mukesh Kochar, National Head of Wealth at AUM Capital, notes the significant surcharge difference—27% for HNIs and 12% for LLPs. This leads to a substantial tax rate arbitrage of around 8%, a considerable advantage for ultra HNIs.
Kochar suggests that HNIs can achieve tax savings by establishing LLPs with family members as ultimate investors. While the base tax rate for both HNIs and LLPs is 30%, the higher tax bracket for LLPs is 34.944%, compared to 42.744% for Ultra HNIs.
In the realm of tax-saving strategies, experts stress the importance for HNIs to strategically undertake investments or expenses. Section 80C of the Income Tax Act, 1961, provides deductions of up to ₹ 150,000 for various investments, such as Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS) mutual funds, National Savings Certificates (NSC), Employee Provident Fund (EPF), tax-saving fixed deposits, life insurance premiums, tuition fees, and home loan principal repayments.
Regarding capital gains income, HNIs traditionally invest in government-issued bonds under Section 54EC of the Income Tax Act, 1961, to seek exemptions. However, recent changes in the Finance Act, of 2023, have limited several avenues available to HNIs, including introducing a cap of ₹ 10 crore for capital gains invested in residential property.
HNIs’ Strategic Relocation and Tax Optimisation Trends
Interestingly, HNIs are strategically relocating family offices to Gift City and other low-tax jurisdictions outside India to optimise investment returns. Family Investment Funds (FPIs) established in Gift City benefit from 10-year tax exemptions and relaxed exchange control regulations, facilitating flexible fundraising and international investments. Some countries within a short flight distance from India offer minimal to zero taxation on personal income.
S Sriram points out that recent reports indicate a significant number of HNIs have moved out of India, citing potential tax savings as a primary motivation. Shifting residence to countries with lower taxes could result in savings of close to 40% on non-India-sourced income.
In addition, newer investment instruments are being explored to reduce tax effects, although the scope of tax savings through complex investment structures has diminished over the last decade.
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