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

High-net-worth individualsHigh-net-worth individuals has learned about a creative method to reduce taxes. Tax planning technique helps high net worth individuals (HNIs) reduce their tax liability.

High-net-worth individuals (HNIs) are increasingly using Limited Liability Partnerships (LLPs) as an alluring tax planning option in an effort to strategically minimize their tax obligations. By taking advantage of favorable tax treatment and single-layer taxation, LLPs provide HNIs with a special advantage that helps them lower their tax burden.

LLPs pay a flat tax rate of 34.94% on their entire income, which is a substantial benefit over the higher individual tax rates that HNIs who fall within the highest tax bracket must pay. In addition, the profits distributed by an LLP are not subject to double taxation, meaning that there is only one tax layer instead of the two that are normally imposed on corporations.

Since LLPs have such a favorable tax structure, HNIs looking to reduce their tax obligations are choosing them more and more. Through the use of limited liability companies (LLPs), high net worth individuals (HNIs) can efficiently lower their overall tax liability.

To demonstrate the possible advantages, let’s look at a fictitious situation where an HNI invests in X Ltd. In the event that the HNI received dividends from their investment in X Ltd, the highest tax bracket’s residents would normally pay 42.74% (39% under the new tax regime) tax on the dividend income.

The effective tax rate on dividends received from X Ltd would be lowered to 34.94% if the HNI owned shares of X Ltd through an LLP. The potential tax benefits that HNIs can obtain by using LLPs for their investments are highlighted by this large tax rate difference.

The increased recognition of LLPs’ advantageous tax treatment and capacity to efficiently lower tax liabilities is the main factor behind HNIs’ growing adoption of LLPs. Experts stress that taking such tax planning actions is fully compliant with the legal restrictions set forth by the authorities.

“LLPs provide HNIs, especially those with higher incomes, with a tax-efficient structure. “Compared to other business structures, the lower tax rate and single-layer taxation provide a significant advantage,” a tax expert said.

In an effort to maximize investment returns, HNIs are also considering the strategic relocation of family offices to GIFT City and other low-tax jurisdictions outside of India. Established in GIFT City, Family Investment Funds (FPIs) are eligible for 10-year tax exemptions and lenient exchange control regulations, which allow for flexible fundraising and foreign investment opportunities.

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.

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