Strategizing Your Taxes: Critical Tax Planning for HNIs and UHNIs

Taxation is unavoidable in the case of financial planning, and tax management on a strategic level can play a significant role in the conservation and growth of wealth. High-Net-Worth Individuals and Ultra-High-Net-Worth Individuals must navigate complex tax structures to minimize liabilities. This article deals with fundamental provisions of the Income Tax Act, with specific focus on major strategies for minimizing tax burdens under significant income heads.

Understanding Tax Regimes: Old and New

Income Tax Act has two different tax regimes:

Old Tax Regime

Minimum Exemption Limit:
Normal taxpayer: ₹2,50,000
Resident Senior Citizens (above 60 years): ₹3,00,000
Resident Super Senior Citizens (above 80 years): ₹5,00,000

Tax Rebate: ₹12,500 in case of total income below ₹5,00,000.

Surcharge: Only up to 15% on LTCG, Dividend Income, and STCG from Listed Equity/Equity MF.

New Tax Regime

Minimum Exemption Limit: ₹4,00,000 for all individual taxpayers.

Tax Rebate: ₹60,000 to resident individuals with total income capped at ₹12,00,000.

Surcharge: Limit capped at 15% on LTCG, Dividend Income, and STCG from Listed Equity/Equity MF.

HNIs and UHNIs: Fall largely in the 30% slab rate under both tax regimes.

Impacts of Indexation on Taxation

Understanding Indexation

Indexation adjusts the cost price of a property according to the extent of inflation so that it reduces the tax on capital gains. The procedure is provided as:

Indexed Cost Value = (Purchase Price) * (Cost Inflation Index (CII) of Year of Sale / CII of Year of Purchase)

Recent Changes

• Until July 23, 2024: Indexation applied to any Long-Term Capital Asset, except Bonds/Debentures and listed equity shares or equity mutual funds.
• From July 23, 2024: No indexation benefit on any asset.
• Real Estate Exception: Real estate properties acquired before July 23, 2024, are eligible to be taxed under the old provisions (20% indexed) for resident individuals and HUFs.

Taxation of Gifts

Gift Tax Regulations

• Gifts exceeding ₹50,000 are taxed in full in the recipient's hands.
• Gifts received from relatives are exempt from taxation. The relatives are categorized by the Income Tax Act as:
  • Spouse
  • Brothers and sisters (self and spouse's)
  • Parents and grandparents (self and spouse's)
  • Lineal descendants and ascendants

Clubbing of Income

• Any income earned from an asset or money received as a gift from another person will still be taxed in the name of the donor.
• This provision is generally applicable for gifts received by:
  • Spouse
  • Minor children
  • Daughter-in-law
  • HUF

Tax Implications on Anand Rathi Wealth Products

Different investment products come with different tax implications:

• Equity Investments: LTCG taxed at 12.5% over ₹1.25 lakh, STCG at 20%.
• Debt Mutual Funds: Slab rate taxable, irrespective of holding period (from April 2023 rule amendment).
• Real Estate Transactions: Capital gains tax is applicable, with option for indexation on purchases prior to July 2024.
• Dividends: Taxed in personal income slabs, 10% TDS deducted if over ₹5,000 annually.

Tax efficiency is a crucial component of the financial planning of HNIs and UHNIs. Understanding indexation benefits, tax regimes, surcharge ceilings, gift tax and clubbing provisions helps one plan investments in the most tax-effective manner. Thoughtful tax planning ensures not only the generation of wealth but also tax outlays minimized.

To begin filing your taxes, you may visit the official Income Tax e-filing portal here.

FAQs on Taxation Strategies for HNIs and UHNIs

Q1: Which tax regime is more appropriate for HNIs and UHNIs?

HNIs and UHNIs typically benefit from the Old Tax Regime due to available exemptions and deductions. However, a comparison based on specific income sources and exemptions must be done before opting for the regime.

Q2: How do I reduce my tax burden on capital gains?

Tax burden may be minimized by employing strategies like indexation (where assets are prior to July 2024), tax harvesting, gifting, and holding on to investments in the long run to take advantage of LTCG taxation.

Q3: Do gifts received from relatives attract taxation?

No, gifts received from relatives, as defined under the Income Tax Act, are exempt from taxation. But if the gift is yielding income, the income, in some cases, might be clubbed with the donor's income for tax purposes.

Q4: What is the surcharge for HNIs?

The surcharge on LTCG, STCG from listed equities and equity mutual funds and Dividend Income is capped at 15%, providing relief to the most taxed person. For other income, a surcharge can go up to 37% depending on the total income of the taxpayer.

Q5: What is the tax on mutual fund dividends?

The dividend is part of the recipient's taxable income and charged based on individual slab rates. TDS at 10% is levied on dividends over ₹5,000 annually.

Q6: Can real estate transactions still be indexation-facilitated?

Yes, for properties bought before July 23, 2024, only resident individuals and HUF have the option of paying 20% tax with indexation, which is a tax-saver in its own right.

Q7: How do clubbing provisions impact transfer of wealth?

Clubbing provisions prevent tax evasion by ensuring that income generated from donated funds is still taxable in the hands of the donor if donated to a spouse, minor child, HUF, or daughter-in-law.

Q8: Are tax-free bonds still valuable to HNIs?

Although tax-free bonds earn tax-free interest income and are still a secure, tax-efficient investment, one should consider the post-tax returns to determine the worthiness of bonds.