The following Q&A was first published in the Legal 500 and Legal Business Magazine on 8th March, 2024. The same was written by our Private Client team at Cyril Amarchand Mangaldas. The online version of the Q&A can be found here.
How does estate planning differ in India compared to other countries, especially in light of unique family structures and property laws?
Indian inheritance related laws are diverse and vary on a number of factors, such as the nature of the assets (movable or immovable), their location, and the personal law of an individual, which in turn is largely based on their religion. For instance, probate of a will is required only for individuals following a particular religion and if the immovable property is situated in a presidency town in India. Hindu succession law is also vastly different from Muslim or Christian succession law.
Therefore, succession planning depends on considerations of each family and individual. Some common considerations while succession planning include:
- family governance issues like passing on the corporate control and ownership,
- manner and modality of transmission of estate by the next generation family members, including those who are residing overseas in the context of the Indian foreign exchange control regime etc.
What are the key tax considerations for high-net-worth individuals in India, particularly in terms of wealth tax, income tax, and inheritance tax?
India does not levy any inheritance tax, wealth tax, or estate duties. Gifts received from specified relatives are also exempt from tax.
Capital gains tax is leviable on profits made from the sale of assets held as investments. The rate of capital gains tax, inter alia, depends on the nature of capital asset, its period of holding, residential status of the taxpayer, etc.
Regarding personal taxation, with progressive tax slabs and additional surcharges applicable to higher incomes, the highest effective tax rate is about 39%, or 42.74%, depending on the tax regime opted for by the taxpayer.
How have recent regulatory changes in India, like amendments to the Income Tax Act or the introduction of new financial regulations, affected private clients?
Individual taxpayers have the option to pay tax under two tax regimes. The new regime provides lower tax rates if taxpayers forego certain specified deductions/exemptions. Recently, the government simplified the new regime by reducing the number of tax slabs and also increased the tax exemption limit from INR250,000 to INR300,000. The highest surcharge rate was also reduced from 37% to 25% under the new regime. The new regime was further made the default regime.
The introduction of the new overseas direct investment regime has drawn a clear demarcation between overseas direct investment (ODI) and overseas portfolio investment (OPI). ODI is a strategic investment into unlisted or listed foreign entities, while OPI refers to portfolio investments into listed foreign companies. However, the very low limit of remittances by resident individuals remains unchanged at $250,000 per financial year. These routes are important, as they allow private clients to transfer and hold wealth overseas.
What specific challenges and opportunities do you encounter when managing legal affairs for NRI clients, especially in terms of cross-border wealth management and tax compliance?
NRIs are typically only taxed on their India-sourced income in India. NRIs are allowed to remit an amount up to only $1m, which is a major limitation.
Residential status in India is a key driver of estate planning. This depends on the physical stay of an individual taxpayer in India. For instance, any individual who spends more than 182 days or more in India in a financial year may be considered as a resident of India for taxation purposes, allowing for their entire global income to be taxed in India. Other considerations vis-à-vis residency apply under exchange control laws. Putting these together, NRIs can partake in sophisticated estate planning for their worldwide and onshore assets with careful management of their tax and foreign exchange residency.
With the increasing relevance of digital assets and technology in personal wealth, how is your firm adapting its practices to cater to these modern aspects of estate planning for your clients in India?
There is a lack of clarity regarding the classification of digital assets, and regulations regarding the same. The Indian government has generally been hostile to assets such as NFTs and cryptocurrencies.
From a tax perspective, taxation at 30% (plus applicable surcharge and cess) was introduced on income arising from transfer of virtual digital assets (which includes cryptocurrencies, and non-fungible tokens), from 1 July 2022.
In your experience, what are the most significant legal challenges faced by private clients in India regarding real estate and property transactions, considering the regional diversity in property laws?
In India, revenue records are found in a multiplicity of languages, depending on where the property is located. The process of dealing with local authorities can be a very strenuous and tedious experience. Even the rate of stamp duty leviable on an instrument differs in every state. The succession of real estate is often a complicated and time-consuming process in India, with local authorities having their own procedures (such as requirement of probate, legal heirship certificate, etc) for effecting transfer of assets and interests.
As a result, private clients need to rely on local on-ground consultants practising in the relevant jurisdiction to facilitate the process and last-mile completion.
How do you approach succession planning for family businesses in India, particularly in the context of traditional family structures and business dynamics?
In India, most family business (or indeed, most businesses generally) are still run by the patriarch – and succession typically follows to the eldest male child. Most shareholding is still individually held by the patriarch, who prefer to pass on the same under their will. Hence, family dynamics and the wishes of the patriarch are a key factor driving estate planning. Generally, male heirs have been preferred, but with changing times, female heirs and successors are becoming more common.
Private trust structures are getting more common, where the patriarch prefers to remain in charge of the trust set up for the benefit of the next generation.
What advice do you offer to high-net-worth individuals in India on compliance with foreign asset reporting and management, especially in the light of stringent regulations like the Black Money Act?
The Black Money Act was introduced with the intention of curbing undisclosed foreign assets and income. It imposes a 30% rate of taxation on the taxable value of the income or the asset undisclosed, and the penalties for non-disclosure could be up to three times of the tax computed. Apart from civil liabilities, the Act also allows for imprisonment for a period between three months to ten years.
In practice, the tax authorities typically conduct search and seizure operations when credible information of direct-tax evasion is brought to notice while the Enforcement Directorate is typically involved in identification of proceeds of crime generated, provisional attachment of assets, and filing prosecution complaints.
As a general approach, we strongly recommend all clients to disclose all their assets and incomes following the due process and requirements, rather than find themselves in a very one-sided defensive situation with the authorities.
Can you elaborate on the legal intricacies and advantages of setting up charitable trusts and foundations in India for philanthropic activities by private clients?
Public trusts in India can either be religious trusts or charitable trusts. Not all states in India have specific legislations for regulating such public trusts. Public charitable trusts are exempted from income tax (subject to satisfaction of prescribed conditions), but the preservation of this status, inter alia, requires for onerous disclosures and meticulous book-keeping
of accounts.
Depending on the state in which a public trust is established, there may be a high level of regulatory interference in the operations of such public trust. For instance, in Maharashtra, any disposal of an immovable property by a charitable trust is prohibited without the consent of the charity commissioner.
With the rapid technological advancements in India, how is your firm incorporating technology in providing legal services to private clients, particularly in areas like estate management and legal documentation?
True to our motto – ‘ahead of the curve’, we have a dedicated innovation team which continuously explores new tools which aid in enhancing the productivity in work. In the context of legal documentation, we use software named Ment, through which we have transformed high-value, business-critical, sophisticated documents into intelligent templates, allowing for a first draft to be produced rapidly and accurately by simply answering a questionnaire.
Kira, is another widely used software that identifies, extracts, and analyses text in contracts and other documents. We also use other AI oriented tools to extract relevant data, supporting caselaw, and helpful legal constructs to make the process of providing legal advice more productive.
