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5 tax saving options for high net worth investors in 2016
December, 14th 2015

In taxation parlance, pursuant to the recent Finance Act 2015 which has been legislated, 2 per cent additional surcharge has been proposed on individuals having a taxable income of Rs 1 crore (Rs 10 million) and above.

In taxation parlance, pursuant to the recent Finance Act 2015 which has been legislated, 2 per cent additional surcharge has been proposed on individuals having a taxable income of Rs 1 crore (Rs 10 million) and above. Therefore, the individuals falling under this category of tax payers, can be perceived as the high net worth investors, or HNIs, class.

We collate five tax saving options that experts feel could help HNIs:

Investment in listed securities for more than one year (for equity shares) and more than three years (for debt instruments) is more preferable depending on the risk appetite of the investor rather than conventional modes like fixed deposits and savings account. The income from listed shares comes under the head capital gain and dividend. The dividend from listed securities and long term capital gains are tax-free.

Suresh Surana, founder, RSM Astute Consulting Group, said, “Based on informed market decisions, it is advisable to consider the option of investment in listed shares. Further, in case where such stocks are held for a period of 12 months and thereafter transferred through the stock exchange, the gains shall be in the nature of Long Term Capital Gains and shall be exempted from tax in India. Considering the minimal holding period from liquidity perspective and the current tax exempt status of investments in listed shares held for more than 12 months, it is an attractive option for HNIs to park their surplus funds subject to the risk appetite of such individual.”

Tax planning through home loan

HNIs can buy residential house on home loans. This will increase their wealth and at the same time help them to plan their taxes. Amit Maheshwari, managing partner, Ashok Maheshwary & Associates, said, “If a residential house is purchased through a home loan, this will allow an individual to claim deduction of interest under section 24. The maximum deduction allowed for a self occupied property is Rs 2,00,000 and in case of a person having more than 1 house property, then the deemed rental provision will allow him to set off full amount of interest against the market rental of that property. However, standard deduction at 30 per cent will still be allowed. This can result in huge tax saving.”

Investing in tax-inefficient options

Debt funds allow deferring the tax till the investors withdraw the investment. If the taxpayer hold these for three years, he will get the benefit of lower tax as the income from debt funds will be treated as long-term capital gains and taxed at 20 per cent after allowing benefit of indexation. “An investor in the 30 per cent tax bracket would have to pay Rs 10,028 in tax on a 3-year fixed deposit of Rs 1 lakh. But if the same amount is invested in a debt mutual fund or a 3-year FMP, once can get away by paying a tax of only Rs 595,” said Maheshwari.

Deposits made in Non-Resident External (NRE) / Foreign Currency Non – Resident (FCNR) deposits

In case where such HNIs are non-resident Indians and have liquid funds, they can opt for investment in the term deposits under the NRE (rupee deposits) or FCNR (foreign currency deposits) accounts, interest from which is exempt from tax under the Income Tax Act in India. “This kind of an investment strategy can be adopted in case of a risk averse investor having deep pockets, who wish to invest in India and also avail of the tax benefits. However, the tax implication of such investment in the country of their residence needs to be ascertained,” said Surana.

Tax saving through Bonus Stripping

The practice of buying stocks or mutual fund units while taking part in a bonus issue allowing to book losses on the original investment value is called bonus stripping. “Bonus stripping in shares is an option where an investor buys shares of a company which has announced bonus on its shares and later sells them off after bonus date and book notional loss. This notional loss can be legally adjusted against the short term capital gain or long term capital gain from any capital assets for the year. Unadjusted loss can be carried forward to 8 financial years. This is a good strategy for high tax bracket investors,” said Maheshwari.

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