Optimizing Personal Tax Burdens with Legal Structuring Under the New Tax Regime
Explore how legal structuring, including the use of trusts and careful NRI management, can help optimize personal tax burdens under the new tax regime. Discover key strategies and considerations to ensure compliance and effective tax planning.
Tax PlanningLegal StructuringTrustsNri TaxationGaarReal EstateJun 29, 2025
Interestingly, private irrevocable discretionary trusts are increasingly being used by High Net Worth Individuals (HNIs) for succession planning, asset protection, and tax deferral. These structures allow the settlor to separate ownership and enjoyment, consolidating estate planning while managing tax exposure. Trusts can be specific, where beneficiaries and their shares are fixed and income is taxed in their hands, or discretionary, where trustees determine distributions, and income is taxed at the maximum marginal rate at the trust level.
From a tax perspective, transfers to irrevocable trusts are not treated as 'transfers' under Section 47, thereby escaping capital gains tax. If the trust is created solely for the benefit of relatives, the transfer is exempt under Section 56(2)(x). The trust is assessed as a representative assessee under Sections 160–164, depending on its nature.
The Bangalore ITAT’s ruling in the Buckeye Trust case flagged that allowing trustees to add non-relatives disqualifies the trust from exemption under Section 56(2)(x), making the entire transfer taxable. Though the order was later recalled suo motu, it underscores the need for precise drafting. The case also expanded the interpretation of 'share' under Section 56(2)(x) to include interests in LLPs, partnerships, and trusts—raising concerns for family offices. These developments reinforce the need for trusts to be structured with legal clarity, aligned definitions, and defensible intent.
NRIs and Deemed Residency Risks
Global mobility has led to sharper scrutiny of NRI taxation, especially after the Finance Act, 2020 introduced Section 6(1A). NRIs earning over ₹5 lakh in India and not taxed elsewhere (such as in the UAE, Singapore, or Mauritius) may be deemed a resident, regardless of the 182-day rule. This has triggered considerable litigation, particularly due to the mismatch between tax residency (based on physical presence under the Income Tax Act) and FEMA residency (based on intention and purpose of stay).
For returning NRIs, reclassification to resident or RNOR status carries major tax implications. Interest on NRE deposits becomes taxable once converted into NRO accounts, while FCNR deposits retain tax-free status for two years if RNOR status is met. Long-term capital gains on foreign exchange assets—such as listed shares acquired in forex—are taxed at a concessional 10% under Section 115E, or 12.5% for off-market transfers post 23 July 2024, with potential exemption under Section 115F if gains are reinvested in eligible Indian assets.
FEMA permits repatriation of proceeds from only two residential properties per person, capped at USD 1 million per financial year. Improper disclosure or remittance delays can trigger penal consequences under the Black Money Act or Benami Property Law. Thus, real estate liquidation should be carefully aligned with residency transitions and FEMA remittance windows.
Given these overlapping rules and jurisdictional definitions, proactive tax planning is essential—not just for current compliance, but also for smooth reintegration and asset repatriation upon return.
GAAR and Substance Requirements
General Anti-Avoidance Rules (GAAR), introduced under the Income-tax Act, empower tax authorities to deny tax benefits arising from impermissible avoidance arrangements (IAA). An IAA is one where the main purpose is to obtain a tax benefit, and the arrangement lacks commercial substance, misuses provisions, is not at arm’s length, or lacks bona fide intent.
GAAR provisions (Sections 95–102) identify red flags such as round-tripping, self-cancelling transactions, use of conduits, and concealment of the true nature, location, or ownership of assets. Authorities are empowered to recharacterise or disregard such arrangements, consolidate parties, and reallocate income or deductions.
Structures like trusts, HUFs, or offshore entities must demonstrate real commercial purpose. For instance, a trust formed purely for tax deferral, or an offshore setup lacking substance, may be recharacterised. To mitigate GAAR risk, legal structures must reflect genuine intent, documented rationale, and robust governance, ensuring the tax benefit is incidental, not the sole driver.
While GAAR is critical to curbing abuse, its subjective application and overlap with SAAR (as seen in Ayodhya Rami Reddy Alla v. Pr. CIT (2024)) require careful, principle-based planning. With the simplified tax regime, deduction-based planning is yielding to clear and compliant legal structuring. Vehicles like HUFs, trusts, and NRI planning remain effective only when executed precisely and purposefully. As tax laws evolve, strategies must adapt to ensure optimisation without undermining substance or legitimacy.
Frequently Asked Questions
What are the benefits of using trusts for tax deferral?
Trusts, especially irrevocable discretionary trusts, allow for succession planning, asset protection, and tax deferral. They can separate ownership and enjoyment, manage tax exposure, and consolidate estate planning.
How does the new tax regime affect NRIs returning to India?
NRIs returning to India may face reclassification to resident or RNOR status, which can have significant tax implications. Interest on NRE deposits becomes taxable, and long-term capital gains on foreign exchange assets are subject to specific tax rates.
What is GAAR and how does it impact tax planning?
GAAR (General Anti-Avoidance Rules) empowers tax authorities to deny tax benefits from impermissible avoidance arrangements. Structures like trusts or offshore entities must demonstrate real commercial purpose to avoid recharacterisation.
What are the risks of real estate liquidation for NRIs?
Real estate liquidation for NRIs should be carefully aligned with residency transitions and FEMA remittance windows. Improper disclosure or delays can trigger penalties under the Black Money Act or Benami Property Law.
How can proactive tax planning help NRIs?
Proactive tax planning is essential for NRIs to ensure compliance with overlapping rules and jurisdictional definitions. It helps in smooth reintegration and asset repatriation upon return to India.
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