LEGAL TAX-SAVING STRATEGIES: HUF, LLP, INFRA BONDS, AND MORE

This lowers the tax rate for each portion, potentially reducing the overall tax rate from 30% to 5% or 10% for each member, saving a significant amount in taxes

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India’s affluent are increasingly seeking ways to minimize their tax liabilities, going beyond conventional deductions under Section 80C. High Net-worth Individuals (HNIs) are exploring various avenues to save taxes, as highlighted by Business Standard.

HNIs in India commonly utilize Limited Liability Partnerships (LLPs) as a tax-saving strategy. LLPs offer a reduced tax rate of 34.94%, contrasting with the highest individual tax bracket of 42.74%. Unlike corporations that face double taxation on profits (at the corporate level and upon distribution to shareholders), LLPs are taxed only once on their overall income. This is because profits distributed among LLP partners are exempt from taxation.

Example: An HNI investing in a company through an LLP would pay a lower tax on dividends compared to directly owning shares.  If an HNI invests directly in a company (X Ltd) and receives dividends, the dividend income is taxed at the highest individual tax rate (42.74%). If the HNI holds shares in X Ltd through an LLP, the effective tax rate on dividends received is lower (34.94%) because LLPs are taxed at a lower rate than individuals.

LLPs can be formed with family members, allowing HNIs to manage investments and share profits efficiently.