7-Step Strategy For Wealth Preservation For HNIs

In the fiscal year 2021-2022, actor Akshay Kumar was the highest taxpayer, paying Rs 29.5 crore as income tax. This begs the question: How come none of India’s prominent industrialists with unimaginable wealth are some of the biggest taxpayers? Well, the answer is “Wealth Preservation.” 

Wealth preservation is a critical aspect of financial planning for high-net-worth individuals (HNWIs). With substantial assets, HNWIs face unique challenges and opportunities in managing their wealth. Effective strategies are essential to safeguard their financial legacy while optimizing growth and minimizing risks.

Let’s explore key wealth preservation strategies for HNIs.

Tax Optimization

Tax planning is foundational for HNIs. Tax-deferred accounts can shield income from immediate taxation, allowing funds to compound over time.

Tax-loss harvesting, which offsets capital gains with investment losses, further reduces taxable income. Understanding the distinction between short-term and long-term capital gains—subject to different tax rates—is crucial for timing investment decisions to optimize tax efficiency.

For example, you have an income of Rs 7 Crore for tax optimization this year. Rs 5 Crore is income while Rs 2 Crore is long-term capital gain on your investments. Without tax optimization, you will be paying Rs. Rs. 2.10 Crore under the new tax regime, but this is what it will look like with tax optimization. 

You can invest up to ₹1.5 lakh annually in Public Provident Fund (PPF) accounts, which not only offer tax-free interest but also matures tax-free under Section 80C. Another example is investing in the National Pension System (NPS), which allows an additional deduction of up to ₹50,000 under Section 80CCD(1B), over and above the ₹1.5 lakh limit under Section 80C. You can plan your income and get Rs 1 Crore as an allowance. 

Let’s say you have a long capital loss of Rs 1.5 Crore. You can sell and repurchase the asset to realize the loss, making your effective income of Rs 4 Crores as salary and Rs 50 lakhs as long-term capital gain. So your effective tax will be Rs 1.57 Crore, saving Rs 53 lakhs in taxes.

Tax on long-term capital gain	Without Tax Optimisation	With Tax Optimisation
Salary	50,000,000	50,000,000
Allowance	0	10,000,000
PPF	0	150,000
NPS	0	50,000
Taxable Salary	50,000,000	39,800,000
Long-term capital loss	20,000,000	20,000,000
Affective long-term capital gain	0	15,000,000
Tax on long-term capital gain	20,000,000	5,000,000
Tax on salary	14,685,000	11,737,500
Tax on long term capital gain	1,990,000	490,000
Surge Charges	4,405,500	3,521,250
Total Tax Due	21,080,500	15,748,750

Estate Planning and Wealth Transfer

Estate planning ensures that wealth is preserved and transferred according to one’s wishes, with minimal tax impact. Tools like trusts, wills, and family limited partnerships can be instrumental in structuring an estate plan that aligns with personal and family goals, providing peace of mind and financial security for future generations.

Consider the example of setting up a private family trust with assets worth ₹100 crores. The trust can be structured to provide beneficiaries with an annual income of, say, ₹5 crores while ensuring that the principal amount is preserved for future generations.

Investment Diversification

Diversification across various asset classes is a crucial strategy for risk management. HNWIs should consider a mix of stocks, bonds, real estate, and alternative investments to mitigate risks and capitalize on different market conditions. This approach helps maintain a balanced portfolio that can withstand market volatility.

An HNWI might allocate its investment portfolio across different asset classes with, for example, 40% in equities, 30% in bonds, 20% in real estate, and 10% in alternative investments. This could translate to an investment of ₹40 crores in the stock market, ₹30 crores in government or corporate bonds, ₹20 crores in property, and ₹10 crores in ventures like private equity or startups.

Risk Management through Insurance

Insurance is an often overlooked but vital component of wealth preservation. It is a safety net against unforeseen events that could erode wealth. Life insurance, disability insurance, and liability insurance are some types that HNWIs should consider to protect their assets and their family’s well-being.

HNWIs can opt for a high-value life insurance policy with a sum assured of, say, ₹50 crores. This provides financial security to the family in case of the insured’s untimely demise and can also be used as collateral for loans or to fund business ventures.

Philanthropic Planning

Philanthropy can be a fulfilling way to manage wealth while contributing to society. Establishing charitable foundations or trusts can provide tax benefits and ensure that philanthropic goals are met in a structured and impactful manner.

Philanthropy can be quantified by the example of an HNWI who pledges ₹10 crores to set up a scholarship fund at a leading university. This not only aids in tax deductions but also creates a lasting legacy. This will also provide you with tax benefits under Section 80G, and all the amount donated won’t be taxable.

Investment in Tangible Assets

Investing in tangible assets like real estate or collectibles can offer stability and diversification. These assets appreciate over time and can be less susceptible to market fluctuations, providing a solid foundation for a wealth preservation strategy.

Investing in tangible assets can be illustrated by purchasing a luxury apartment in South Mumbai for ₹25 crores, which has the potential to appreciate at an average of 7% per annum, providing both a tangible asset and a steady appreciation in value.

Managing Professional Advisors

HNWIs often rely on a team of professional advisors to manage their wealth. A trusted network of experts, including financial planners, accountants, and legal counsel, can help navigate the complexities of wealth management and ensure that all strategies are aligned with the individual’s overall financial objectives.

HNWIs may spend around 1-2% of their assets on professional advisory services annually. For an estate worth ₹500 crores, this could mean spending ₹5-10 crores on expert financial, legal, and tax advice to ensure optimal wealth management.

Conclusion

Wealth preservation for HNWIs is not a one-size-fits-all endeavor. It requires a bespoke approach considering the individual’s unique circumstances, goals, and risk tolerance. By employing these strategies, HNWIs can ensure the strategic health and growth of their wealth, securing their future financial legacy.

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