In the realm of taxation, high net-worth individuals (HNIs) occupy a distinctive position, straddling the fine line between affluence and accountability. As India continues its journey towards economic growth and social development, the taxation of HNIs has emerged as a pivotal topic of discussion and debate. From intricate legal frameworks to evolving policies, the landscape of HNI taxation in India presents a labyrinth that demands exploration and understanding.
According to the latest reports, India's HNI population is on the rise, with a projected rise to 1.65 million individuals in the next 5 years. These individuals often possess substantial wealth and have unique tax planning needs and it is obvious that the common question that they might have is - How can I save taxes as an HNI?
With the top income tax bracket in India currently at 30%, it's crucial for HNIs to explore legal avenues to minimize their tax burden and do proper Tax Planning in India.
So in this guide, let us delve into several important questions like how are HNI taxed in India, How can I save taxes for HNI, What is the tax rate for high net-worth individuals in India and much more.
How are HNIs Taxed in India - Tax Rate for HNIs
India follows a progressive tax structure, where higher income levels attract higher tax rates. High Net Worth Individuals (HNIs) are classified as residents or non-residents based on their stay in India. Residents are taxed on their global income, while non-residents are taxed only on their income earned in India. Consequently, HNIs are subject to additional taxes like surcharges and cess. The tax rate for HNIs includes different income tax slabs, surcharges, and cess.
| Income Range | Tax Rate |
|---|---|
| Up to Rs. 3,00,000 | NIL |
| Rs. 3,00,000 to 6,00,000 | 5% |
| Rs. 9,00,000 to 12,00,000 | 15% |
| Rs. 12,00,000 to 15,00,000 | 20% |
| Above Rs.15,00,000 | 30% |
Currently, a surcharge of 10% is levied if the income varies between Rs. 50 lakhs to Rs. 1 crore, 15% for earnings ranging between Rs 1 crore to Rs 2 crores, 25% if it exceeds Rs. 2 crores. Alongside this, incomes are also subject to an education cess of 4%.
Additional read:Where do HNIs invest in India?
Key Components of HNI Taxation
There are mainly five components of income in India. Here's an overview of the taxable income for HNIs:
1.Salary Income
The Salary income includes the basic salary, allowances, bonuses, commissions, and other perks received from employment.
2.Business/Professional Income
Income from business/profession includes income from consultancy, freelancing, partnership firms, proprietorships, etc.
3.Capital Gains
Capital gains are categorized into two types:
Short-term Capital Gains (STCG): If the asset is held for less than 24 months (36 months for the immovable property), the gains are considered short-term.
Long-term Capital Gains (LTCG): If the asset is held for more than 24 months (36 months for immovable property), the gains are considered long-term.
4.Rental Income
It includes taxes on income from rental properties—residential or commercial. HNIs who earn rental income from real estate properties are usually required to report and pay taxes on this income. The tax treatment of rental income may involve deducting certain expenses associated with maintaining the property, such as property taxes, mortgage interest, repairs, and depreciation.
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5.Other Sources of Income
Other sources of Income like Dividends received by HNIs from shares they own in companies are often subject to tax. The tax rate on dividends may differ from the tax rate on regular income and may vary depending on factors such as the type of dividend and the individual's tax bracket.
In addition, Interest earned on bank deposits, bonds, or other fixed-income investments is generally considered taxable income and is also subject to income tax.
6.Domestic and International Income:
HNIs often have a global presence and may generate income from both domestic and international sources. Tax laws in many countries require individuals to report and pay taxes on their worldwide income. This means that HNIs may be subject to taxation on income earned both domestically and internationally, depending on the specific tax regulations of their country of residence.
You must be aware that HNIs in India are subject to tax on both domestic and international income—- where residents are subject to taxation on their global income. Non-residents are taxed only on their income earned within India.
Importance of Tax Planning for HNIs
Proactive tax planning provides several benefits for High Net Worth Individuals (HNIs):
1.Maximizing Tax Savings: Proactive tax planning allows HNIs to identify and utilize available tax deductions, exemptions, and credits to minimize their tax liability legally. Strategic management of income and investments reduces tax burden and maximizes after-tax income.
2.Optimizing Investment Decisions: Tax planning helps HNIs make informed investment decisions as it empowers them to choose tax-efficient investment vehicles and strategies, and take advantage of tax-exempt or tax-deferred options.
3.Risk Management: Proactive tax planning helps HNIs identify and mitigate potential tax risks. They ensure that their financial transactions and arrangements are in line with tax laws, reducing the likelihood of audits, disputes with tax authorities, or non-compliance issues.
Investment Options for HNIs to Save Taxes
Here are some investment avenues to answer your “How can I save taxes for HNI” question:
1.Equity-Linked Saving Schemes (ELSS): ELSS is a popular tax-saving investment option that offers potential returns along with tax benefits. HNIs can invest in ELSS mutual funds, which have a lock-in period of three years and provide tax deductions under Section 80C of the Income Tax Act.
2.National Pension Scheme (NPS): NPS is a long-term retirement-focused investment option that offers tax benefits. HNIs can contribute to NPS and claim deductions under Section 80CCD(1B) in addition to the deduction available under Section 80C.
3.Unit Linked Insurance Plans (ULIPs): ULIPs combine insurance coverage with investment opportunities. HNIs can invest in ULIPs and avail of tax benefits under Section 80C on the premiums paid.
4.Tax-Saving Fixed Deposits (FDs): HNIs can invest in tax-saving fixed deposits offered by banks. These FDs have a lock-in period of five years and provide tax benefits under Section 80C.
5.Public Provident Fund (PPF): PPF is a long-term investment option with tax benefits. HNIs can contribute to PPF and claim deductions under Section 80C. The interest and the maturity amount are exempt from tax.
Additional read: Should you invest in residential or commercial properties?
Deductions and Exemptions for HNIs
There are various deductions and exemptions available to reduce the tax liability of individuals. Let’s have a look:
1.House Rent Allowance (HRA): HNIs who receive HRA as part of their salary can claim deductions under Section 10(14) of the Income Tax Act. The amount eligible for deduction is the least of the actual HRA received, 50% of the salary for individuals residing in metro cities (or 40% for non-metro cities), or actual rent paid minus 10% of the salary.
2.Leave Travel Allowance (LTA): HNIs can claim exemptions on LTA under Section 10(5) of the Income Tax Act. The exemption is available for expenses incurred on domestic travel for the employee and their family members, subject to certain conditions and limitations.
3.Medical Expenses: HNIs can claim deductions for medical expenses under various sections of the Income Tax Act. For example, under Section 80D, deductions are available for premiums paid for health insurance policies for self, spouse, children, and parents.
4.Section 80C: HNIs can claim deductions under Section 80C for investments and expenses up to a maximum of Rs. 1.5 lakh. This includes investments in instruments such as the Public Provident Fund (PPF), National Savings Certificates (NSC), Employee Provident Fund (EPF), tax-saving fixed deposits, and payment of life insurance premiums. Tuition fees for children's education and principal repayment on home loans are also eligible for deductions under this section.
5.Section 80G: HNIs can claim deductions for donations made to eligible charitable institutions under Section 80G.
Capital Gains Tax Planning for HNIs
Capital gains tax planning in India for HNIs involves strategies to minimize the tax liability on the sale of assets. Here are some strategies to minimize capital gains tax:
1.Indexation Benefit: HNIs can utilize the indexation benefit to adjust the cost of acquisition of assets for inflation. Using the cost inflation index (CII) provided by the government adjusts costs to current rates and lower capital gains.
2.Exemptions and Deductions: HNIs can explore exemptions and deductions available for specific types of investments. For example, investments in specified bonds like Capital Gain Bonds issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) provide an exemption from capital gains tax.
3.Capital Loss Set-Off: HNIs can set off capital losses against capital gains to reduce their overall tax liability. Capital losses can be carried forward for up to 8 assessment years and can be utilized to offset future capital gains.
4.Tax-Advantaged Accounts: HNIs can consider investing in tax-advantaged accounts such as the Equity Linked Savings Scheme (ELSS) or retirement accounts like the National Pension Scheme (NPS) to enjoy tax benefits and potentially reduce their capital gains tax liability.
Alongside this, HNIs may also consider reinvestment of capital gains in:
1.54EC Bonds: HNIs can invest their capital gains in specified bonds issued by government entities under Section 54EC of the Income Tax Act. These bonds have a lock-in period of five years and provide tax exemptions on the reinvested capital gains.
2.Startups and Venture Capital Funds: Investments in eligible startups under the government's Startup India initiative can provide tax benefits under Section 54GB of the Income Tax Act.
3.Tax-Saving Instruments: Invest capital gains in tax-saving instruments like Public Provident Fund (PPF), National Savings Certificates (NSC), or tax-saving fixed deposits.These instruments provide tax benefits under Section 80C of the Income Tax Act and allow HNIs to defer taxes on the reinvested amount while earning returns.
Special Considerations for HNIs
Resident HNIs having income earned outside India are subject to tax in India on their foreign income as India taxes the global income of the residents. This in turn may lead to conflict between the countries as to who’ll receive the tax and there comes the Double Taxation Avoidance Agreement (DTAA).
Basically, DTAA is a treaty signed between India and another country to avoid double taxation of income.
Significance of DTAA:
- DTAA ensures that HNIs are not taxed twice on the same income, once in a foreign country and again in India.
- It provides clarity on tax residency, allocation of taxing rights, and mechanisms for resolving tax disputes between countries.
Foreign Assets Reporting:
- HNIs are required to disclose their foreign assets and income earned from such assets to the Indian tax authorities.
Compliance Requirements:
- HNIs need to comply with various reporting requirements, including filing the Foreign Assets and Liabilities Information (FAL) form, Tax Residency Certificate (TRC), and Foreign Tax Credit (FTC) details.
- They must maintain proper documentation, such as bank statements, contracts, and tax-related documents, to support their foreign income and tax position.
Recent Updates and Future Outlook
The Budget for 2023 was a mixed bag for HNIs. From a reduction in surcharge rates from 37% to 25% to taxing market-linked debentures' capital gains as short-term capital gains there are many significant updates in tax laws affecting HNIs.
The decrease in surcharge rate will decrease the tax liability of 10 crores by ₹36.6 lakhs when compared with tax in the old regime. Further, taxing market-linked debentures' capital gains as short-term capital gains suggests that any loss arising on market-linked debentures will be considered as short-term capital loss and will be limited to set off only against STCG/LTCG.
Conclusion
Now that you understand what is the tax rate for high-net-worth individuals in India, how are HNIs taxed in India, the key components of HNI taxation, tax planning in India, and special considerations for HNIs, you must also know important it is for high-net-worth individuals to plan taxes.
Consequently, we strongly recommend you consult a tax professional as it’ll help you receive individualized advice, optimize tax strategies, ensure compliance, and take advantage of available tax-saving opportunities based on your circumstances.
