High-net-worth individuals turn to LLPs for tax optimisation

CA Aman Rajput , Last updated: 22 November 2023  
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I came across a news in the Times of India today morning, hence got an innovative way to save taxes. In this article, I will discuss a Tax planning strategy for High net worth Individuals (HNI) to save their taxes.

In a strategic move to optimize their tax liabilities, high-net-worth individuals (HNIs) are increasingly turning to Limited Liability Partnerships (LLPs) as an attractive avenue for tax planning. LLPs offer a unique advantage that enables HNIs to reduce their tax burden by leveraging favorable tax treatment and single-layer taxation.

LLPs are subject to a flat tax rate of 34.94% on their total income, a significant advantage compared to the higher individual tax rates faced by HNIs falling under the maximum tax bracket. Moreover, the distribution of profits from an LLP is exempt from tax, resulting in a single layer of taxation compared to the double taxation typically applied to companies.

High-net-worth individuals turn to LLPs for tax optimisation

This favorable tax structure has made LLPs an increasingly popular choice for HNIs seeking to minimize their tax liabilities. By structuring their investments and income-generating activities through LLPs, HNIs can effectively reduce their overall tax burden.

To illustrate the potential benefits, consider a hypothetical scenario involving an HNI investing in a company named X Ltd. If the HNI were to receive dividends from their investment in X Ltd, the dividend income would typically 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 reduced to 34.94%. This significant difference in tax rates highlights the potential tax savings that HNIs can achieve by utilizing LLPs for their investments.

The growing adoption of LLPs among HNIs is driven by the recognition of their favorable tax treatment and the ability to effectively reduce tax liabilities. Experts emphasize that engaging in such tax planning measures is entirely within the legal boundaries established by the authorities.

 

"LLPs offer a tax-efficient structure for HNIs, particularly those with higher incomes. The lower tax rate and single-layer taxation provide a significant advantage compared to other business structures," explained a tax expert.

HNIs are also exploring strategic relocation of family offices to GIFT City and other low-tax jurisdictions outside India to optimize investment returns. Family Investment Funds (FPIs) established in GIFT City enjoy 10-year tax exemptions and relaxed exchange control regulations, facilitating flexible fundraising and international investments.

 

In addition, select countries within a short flight distance from India offer minimal to zero taxation on personal income, making them attractive destinations for HNIs seeking to reduce their tax burden.

As HNIs continue to seek innovative strategies to optimize their tax liabilities, LLPs and strategic relocation of family offices are emerging as prominent avenues for achieving tax efficiency and maximizing investment returns. By leveraging these strategies, HNIs can effectively reduce their overall tax burden and enhance their financial well-being.


Published by

CA Aman Rajput
(Chartered Accountant)
Category Income Tax   Report

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