NEW DELHI: In a bid to optimise their tax liabilities, high-net-worth individuals (HNWIs) are increasingly resorting to registering Limited Liability Partnerships (LLPs), according to experts. LLPs offer a unique advantage that enables HNIs to pay less in taxes, making it an attractive avenue for tax planning.
LLPs are subject to a tax rate of 34.94% on their total income, distinguishing them from other business structures. One key feature of LLPs is that the distribution of profits is exempt from tax, resulting in only a single layer of taxation. This factor plays a crucial role in reducing the tax burden for HNIs who choose to register their investments under an LLP.
To illustrate the potential benefits, Lokesh Shah, partner at IndusLaw, gives a hypothetical scenario. If an HNI were to invest in a company named X Ltd and receive dividends from that investment within a specific financial year, the dividend income would normally be subject to a tax rate of 42.74% (39% under the new tax regime) for individuals in the highest tax bracket. However, if the HNI holds shares in X Ltd through an LLP, the effective tax rate on dividends received from X Ltd would be 34.94%.
The utilisation of LLPs has emerged as a compelling option due to the favourable tax treatment they offer. Experts highlight that engaging in such tax planning measures is within the legal boundaries established by the authorities.
“Rate of taxes on LLPs are lower than that of high-net-worth individuals falling under the maximum tax bracket. 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,” said S Sriram, partner at Lakshmikumaran and Sridharan. Meanwhile, Mukesh Kochar, National Head of Wealth, AUM Capital said that HNIs with higher income are charged with a surcharge of 27% and the highest surcharge for LLPs is 12%. Although the base rate for a higher slab is 30% in both cases due to the wide difference in surcharge, the arbitrage in the tax rate is around 8%, which is huge for an ultra HNI.
“So, these HNIs can save tax by creating LLPs with family members who are the ultimate investors. The higher tax bracket for LLP is 34.944% while it is 42.744% for Ultra HNIs,” said Kochar. According to experts, it is important for HNIs to undertake investment or incur expenditure, to save on taxes. “Section 80C of the Income Tax Act, 1961 provides deduction up to R150,000 while computing total income of an assessee. HNIs typically exhaust the full limit by making investments in instruments such as the Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS) mutual funds, National Savings Certificates (NSC), Employee Provident Fund (EPF), tax-saving fixed deposits, payment of life insurance premiums, tuition fees for children’s education and principal repayment on home loans,” said Shah of IndusLaw.
In respect of capital gains income, HNIs typically invest in bonds issued by government entities under Section 54EC of the Income Tax Act, 1961 to seek exemption by investing the capital gains amount. These bonds come with a lock-in of 5 years. “Finance Act, 2023 took away a number of other avenues that were hitherto available to HNIs. These include introducing a ceiling / cap of R10 crore for capital gains invested in a residential property, removal of exempt status for insurance policies with a premium of more than R 5 lakh per annum, and taxing gains from market-linked debentures at individual slab rates,” Shah added.
HNIs flocking to Gift City
Interestingly, HNIs strategically relocate family offices to GIFT City and other low-tax jurisdictions outside India to optimise investment returns. Family Investment Funds (FPIs) established in GIFT City enjoy 10-year tax exemptions and relaxed exchange control regulations, enabling flexible fundraising and international investments. Additionally, select countries within a short flight distance (three hours of flying time) from India offer minimal to zero taxation on personal income, as per Sriram.
“Recent reports suggest that thousands of HNIs have moved out of India, though the sole reason might not be savings on tax outflow. In any case, shifting one’s residence to such countries with lower taxes, saves close to 40% as taxes of non-India sourced income,” he added. “In addition, newer investment instruments are also being used to reduce tax effects. Though the scope of tax savings using complex investment structures have reduced significantly over the last decade, tax laws always take time to cope with innovative measures adopted to save on taxes.” Sriram said.
