This lowers the tax rate for each portion, potentially reducing the overall tax rate from 30% to 5% or 10% for each member, saving a significant amount in taxes.
India’s affluent are increasingly seeking ways to minimize their tax liabilities, going beyond conventional deductions under Section 80C. High Net-worth Individuals (HNIs) are exploring various avenues to save taxes, as highlighted by Business Standard. HNIs in India commonly utilize Limited Liability Partnerships (LLPs) as a tax-saving strategy. LLPs offer a reduced tax rate of 34.94%, contrasting with the highest individual tax bracket of 42.74%. Unlike corporations that face double taxation on profits (at the corporate level and upon distribution to shareholders), LLPs are taxed only once on their overall income. This is because profits distributed among LLP partners are exempt from taxation.
Example: An HNI investing in a company through an LLP would pay a lower tax on dividends compared to directly owning shares. If an HNI invests directly in a company (X Ltd) and receives dividends, the dividend income is taxed at the highest individual tax rate (42.74%). If the HNI holds shares in X Ltd through an LLP, the effective tax rate on dividends received is lower (34.94%) because LLPs are taxed at a lower rate than individuals. LLPs can be formed with family members, allowing HNIs to manage investments and share profits efficiently. “LLPs offer pass-through taxation, where business income is not taxed at the company level but at the individual partner level. This can be beneficial for profit distribution and tax planning, especially for businesses with high profit margins. However, one will need to ensure that their business operations align with the LLP structure for optimal tax advantages,” said Ritika Nayyar, Partner, Singhania and Co.
Point to note: An LLP set up in India will broadly be a tax resident of India, despite temporary change in residential status of any partner. Share of profits received from a LLP are fully tax exempt, despite the residential status of the partner.
Hindu Undivided Family (HUF): By creating a Hindu Undivided Family, an individual can split their income among family members, reducing the total tax burden. Each member of the HUF, including the HUF itself, enjoys the benefit of separate tax slabs and deductions. “ For example, Ashok splits Rs 10 lakh of family business income across four family members in the HUF, each earning Rs. 2.5 lakh. This lowers the tax rate for each portion, potentially reducing the overall tax rate from 30% to 5% or 10% for each member, saving a significant amount in taxes,” said Amay Jain, Senior Associate, Victoriam Legalis – Advocates & Solicitors.
Multiple PAN cards: An HUF can have a separate PAN card from its members, allowing income splitting and potentially lowering the overall tax burden.
Deductions: HUFs can claim deductions available to individuals under Section 80C (investments, PPF, etc.). Tax-efficient asset transfer: Assets can be transferred to the HUF, and income generated might be taxed in the HUF’s hands, potentially at a lower rate. Angel Investing: Investing in promising startups can yield significant returns, and the Income tax Act offers tax deductions for investments in startups under Section 54GB. This can be a great way to support innovative ventures while potentially lowering your tax burden. One should conduct thorough due diligence before investing, as startups are considered inherently risky.
Nayyar explains this in detail: Example: Lets say Mr X after thorough due diligence invests Rs 1 crore (Rs. 10 million) in the startup. Under Section 54GB of the Income Tax Act, they may be eligible to deduct a portion of this investment from their taxable income, subject to certain conditions. Potential tax Benefit, assuming 50% of the investment (Rs. 50 lakh) qualifies for deduction under Section 54GB, Mr X could potentially save Rs. 50 lakh (deduction) x 30% (assumed tax bracket) = Rs. 15 lakh on their taxes. Qualifying for the full deduction under Section 54GB might have requirements such as holding the investment for a specific period and the startup meeting certain criteria Participation in VCFs that invest in a basket of startups may offer tax benefits under specific schemes.
This allows you to diversify your portfolio across multiple high-growth potential ventures while potentially enjoying tax advantages. Partner with a reputable wealth management firm to navigate the complexities of VCF investments.
Example: When one sells the shares in the fund after 12 months, can take benefit of lower rate of tax @20% as applicable to long term capital gains and if such proceeds are re-invested as per sec 54F, you do not end up paying taxes even on this sale of shares, subject to specified conditions.