Avoid taking home loan for interest benefit : It has been an established trend among high net worth individuals (HNIs) to avail of a home loan to invest in real estate rather than using this for taking advantage of the available tax breaks. One, they could reserve their own funds for more liquid asset classes rather than high-value real estate which cannot be easily liquidated and two, they could claim the deduction on the entire interest paid to the bank against rental income generated from the property.
However, with the recent amendment in Budget 2017, a person can claim a total loss limited to Rs 2 lakh on house property, with respect to the interest he pays on home loan. The balance loss, if any will be carried forward and claimed as expenditure in subsequent eight years. As the interest deduction has been limited to Rs 2 lakh, HNIs should avoid taking a home loan and cut down the interest outflow if it was being done purely for the tax saving purpose.
Go for separate legal entities : HNIs can also form separate legal entities to park their investments and generate income therein. The simplest form of entity which is the Hindu Undivided Family and they claim the benefit as per the usual tax slabs and chapter VI deductions. Large-ticket size investments can be routed through a private investment trust. The advantage of forming an investment trust is that it is managed by professionals, you get a diversified portfolio, no disputes at the time of distribution/inheritance, assets are safeguarded against personal liabilities and no personal onus of tax liability on income generated.
Park funds in tax-free investments : Indian households still love to invest in term deposits, which are principally safe options. However, income generated in form of interest on time deposits is taxable. With interest rates falling, these investments do not generate high returns and also gets taxed at maximum rate in hands of HNIs. Rather than investing in these instruments, it is advisable to invest in tax-free bonds such as the ones issued by Hudco, NHAI, Ireda, etc, where the principal is protected, while interest earned is not taxable. The income after tax will also be greater than what one earns from a term deposit.
Saving tax on long-term capital gains : Generally, people assume that the exemption on long-term capital gain is available on sale proceeds of residential property. However, this exemption is also available on other asset classes such as gold, shares of unlisted companies, unit of AIFs, commercial properties, etc. HNIs tend to have huge holdings in these asset classes and the sale proceeds can be invested in house property or specified bonds, thereby saving tax at the rate of 20% on the capital gains earned.
Check tax outflow to avoid interest burden : Most HNIs and ultra HNIs have incomes exceeding Rs 1 crore and hence are liable to pay a surcharge of 15% on their tax liability. While paying advance tax during the year, individuals usually forget to pay this surcharge and hence end up paying a simple interest of 1% per month on the quarterly shortfall. Similarly, HNIs having income more than Rs 50 lakh but not exceeding Rs 1 crore also need to pay surcharge of 10%. There is also an additional 1% simple interest per month if the person fails to pay 90% of his tax liability in the form of advance tax. The lesson therefore is to consider the surcharge while paying advance tax so as to avoid the interest penalty.
Avoid short term trading and F&O transactions : HNIs tend to cash in on stock market rallies do short-term trading, or deal with Futures and Options (F&O). Short-term equity trading is chargeable to tax at the rate of 15%, but F&O transactions are chargeable under business gains and are liable for tax at the maximum rate of 30%. Moreover, if the margin on transaction exceeds Rs 1 crore during the year, the person is liable to maintain books of accounts and carry out audit of the same before filing his income tax returns.
Avail full deductions benefits : For HNIs, deductions under section 80C only lead to a nominal reduction in tax liability. However, there are other sections which the HNIs need to look at – Mediclaim, education loan, National Pension Scheme.
STAY INFORMED
- Invest in tax-free bonds such like those issued by Hudco, NHAI, Ireda
- Consider the surcharge while paying advance tax to avoid interest penalty
- Avoid short-term trading and Futures and Options transactions
- Avail tax-deduction benefits to the fullest like mediclaim, pension, etc
The writer is CEO, Karvy Private Wealth
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
 "Tax deductions")
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}