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Tata Capital > Blog > Navigating the New Tax Regime: Implications for High-Net-Worth Individuals (HNIs)

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Navigating the New Tax Regime: Implications for High-Net-Worth Individuals (HNIs)

Navigating the New Tax Regime: Implications for High-Net-Worth Individuals (HNIs)

High-net-worth individuals (HNIs) often find themselves at the intersection of wealth creation and regulatory complexity. And with the introduction of the new tax regime, tax planning for high net worth individuals can no longer rely on traditional methods. 

The new tax regime introduces a distinct set of advantages and challenges, which requires a strategic and forward-looking planning. With the right approach, you can not only safeguard your wealth but also ensure full compliance with evolving legal requirements.

This article outlines how recent tax changes impact HNIs and provides high net worth tax strategies to navigate the new tax regime effectively.

Who are high-net-worth individuals?

In India, high net worth individuals are people with large investable wealth, typically exceeding Rs. 5 crores. This group includes successful business owners, company directors, senior professionals, and those who have inherited large assets. 

What is the new tax regime?

Introduced in the Budget of 2020, the new tax regime offers lower tax slab rates but also reduces the numbers of exemptions and deductions available under the old regime. The aim is to offer a simplified tax structure with lower rates. Given its simplified structure, the new tax regime may appeal to HNIs, who often deal with complex income streams and diverse investment portfolios. 

Critical tax rules affecting HNIs

As an HNI, these big tax changes can impact your financial planning:

1. Higher surcharge rates in the Old tax Regime: HNIs face higher surcharges on income above Rs. 5 crore in the old tax regime at 37%, while under the new tax regime the maximum surcharge applicable is capped at 25% for income more than Rs. 2 crore

2. Dividend taxation reform: The dividend received from an Indian company was exempt until 31 March 2020. That was because the company declaring such a dividend already paid dividend distribution tax (DDT) before making payment. At the same time, the Finance Act, 2020 changed the method of dividend taxation. All dividend received on or after 1 April 2020 is taxable in the hands of the investor/shareholder. In simple terms, dividends are now taxed as your personal income rather than at company level.

3. Revised residency criteria: If the income sourced from India exceeds Rs 15 lakhs in a financial year, then 120 days is applicable instead of 182 days. 

4. Scrutiny of High-Value Transactions: Tax authorities now closely monitor high-value transactions like luxury purchases and property deals, requiring proper documentation.

Effective strategies to navigate the new tax regime

The below approaches can help improve your high net worth tax planning with the new tax regime in place:

New vs. Old Tax Regime: 

HNIs should evaluate both the old and new tax regimes to determine which offers greater benefits based on their income sources and deductions available. 

Those with significant investments and expenses that qualify for deductions may benefit more from the old regime.

Investments in Venture Capital funds: 

High-net-worth individuals can diversify their portfolio with alternative investments to maximize tax advantage. Investments in eligible startups can yield tax benefits under Section 54GB, allowing HNIs to defer capital gains taxes.

Invest in Tax Free Bonds: 

HNIs can invest in tax-free government bonds issued by the government of India.  Although low, the interest income from these bonds is entirely tax-exempt, making them a safe and efficient way to generate returns while minimizing tax liability.

Optimization of Capital Gains Tax:

HNIs should carefully manage short-term and long-term capital gains to minimize tax outflow. Reinvestment under Sections 54, 54F, and 54EC (residential house or specified government bonds) can also help defer or reduce capital gains tax.

Tax Loss Harvesting:

Capital losses from underperforming assets can be effectively harvested to offset capital gains through tax loss harvesting.  This reduces the overall taxable gains and allows HNIs to lower their tax burden.

Effective Retirement Planning:

Planning for retirement through tax-efficient investments like the National Pension Scheme (NPS) and other retirement funds ensures both tax savings and financial security.

Estate Planning:

To avoid high tax liabilities on wealth transfers, HNIs should have a well-structured succession plan. Tools like wills, trusts, and family arrangements can help ensure efficient asset distribution while minimizing inheritance or gift tax liabilities.

Leveraging HUF Structure: 

Forming an HUF allows HNIs to pool income and assets under a separate legal entity. HUFs are taxed separately, enabling families to claim additional tax benefits, including exemptions and deductions that help reduce the overall family tax liability.

The bottom line  

Effective tax planning strategies for high net worth individuals require balancing correct tax efficiency with regulatory compliance. By understanding the new tax regime and implementing suitable approaches, you can protect your wealth while fulfilling all legal responsibilities.

Invest with confidence at Tata Capital Wealth. Experts here offer customised tax planning strategies and complete wealth management solutions for HNIs. Visit Tata Capital Wealth to discover how you can enhance your financial position.

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FAQs

What is the tax rate for high-net-worth individuals?

HNIs fall under the 30% tax bracket plus applicable surcharges that can reach up to 37% for income exceeding Rs. 5 crores.

In what ways are trusts shown to be used with the tax planning of highly appreciated individuals?

Trusts help separate personal and business assets while facilitating succession planning and providing tax benefits through strategic distribution of income.

Would high-net-worth individuals who plan ahead know the best ways to handle inheritance tax?

Yes, through early estate planning, private trusts and strategic gift distribution, HNIs can effectively manage potential inheritance tax implications.

What are some key considerations for tax planning for HNIs in India?

Asset diversification, timing of income recognition, tax-efficient investments and comprehensive estate planning are all essential considerations for tax planning for HNIs.

How does the DTAA (Double Taxation Avoidance Agreements) play a role in tax planning for HNIs in India?

DTAA prevents double taxation for HNIs with foreign income by providing credits for taxes already paid internationally, reducing overall tax burden.
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