INDIA: An Introduction to Private Wealth Law

The most populous country in the world, India is a thriving democracy with a flourishing private sector. The private wealth legal system is based on common law principles, interwoven with unique features emerging from religious diversity. Undoubtedly, India offers a legal and economic landscape that is unparalleled.

­­­­Political and Regulatory Stability

In mid-2024, Narendra Modi became the first Indian prime minister in 60 years to gain office for three successive terms. From an economic perspective, this political stability has contributed to consistent growth, wealth creation, and optimism.

The Modi administration has set ambitious economic goals with a focus on making India the world’s third-largest economy from its current position at fifth and aiming to be a USD5 trillion economy by end of their term in government. To advance these ambitions, sustained investment and innovation are anticipated in physical and digital infrastructure, alongside continued reforms in taxation, enhanced focus on international trade, and efforts to ensure regulatory stability.

This favourable environment has resulted in an unprecedented wealth boom. India is home to more billionaires than any country in the world barring the USA and China. With a new USD billionaire minted on an average every five days in 2023 and an 86% increase in the number of individuals having a net worth of more than INR1,000 crores (USD120 million) during the past five years (source: Hurun India Rich List 2024), India is currently witnessing a drastic surge in wealth accumulation.

In this context, an overview of key potential developments and trends in the private wealth domain is discussed here.

Taxation

The taxation regime in India has largely been stable during the past few years. Interestingly, the government has established an internal committee to oversee a comprehensive review of the Income Tax Act 1961, with the goal of making it concise, clear, and easy to understand. The outcome of this review is expected in 2025.

As it stands, Indian tax residents are taxed on their global income, and non-residents are liable to pay income tax only on India-sourced income (any income that is received or deemed to be received in India or has accrued or arisen or is deemed to accrue or arise in India). India also has an intermediate category of persons resident but not ordinarily resident (RNOR) who are taxed on their India-sourced income and such foreign income that is derived from a business controlled or a profession set up in India.

Indian citizens and persons of Indian origin whose total income (excluding foreign source income), exceeds INR1.5 million during the relevant financial year are regarded as tax resident in India if they spend 120 days or more in India instead of the period of 182 days applicable to others.

High net worth individuals (HNIs) falling in the highest income tax slab are taxed at 30% on both dividend and rental income (excluding applicable surcharge and cesses). However, the capital gains regime was significantly revised earlier this year, with the stated aim of rationalisation and simplification.

There is no estate duty, inheritance tax or wealth tax levied in India. Although there have been informal discussions on reintroducing estate duty, there is no official proposal under consideration.

GIFT City

India’s first international financial services centre, the Gujarat International Finance Tec-City (“GIFT City”), was inaugurated more than a decade ago and remains a key part of the current government’s vision on finance and technology. The current government’s re-election earlier this year bodes well for the development of GIFT City.

Recent measures aimed at promoting GIFT City range from increasing avenues for investment in GIFT City, permitting direct listing of equity shares of public Indian companies on the international exchanges in GIFT City, and developing fintech innovation through the International Fintech Innovation Hub. That said, news reports indicate that the Reserve Bank of India (RBI) may have concerns relating to the potential abuse of relaxations of overseas investment rules for investment abroad through GIFT City, which may make some investment avenues unviable until greater clarity and certainty emerges.

Migration of HNIs

Despite economic tailwinds, India continues to experience a high net outflow of HNIs, primarily to the USA, the UK, Singapore and UAE. Major reasons for this trend – and which also influence choice of jurisdiction – include pursuit of a better quality of life, beneficial economic opportunities in some jurisdictions, quality of higher education, and lower taxation rates. Many Indians moving abroad also surrender their passport and obtain foreign citizenship, as India does not offer dual citizenship.

Owing to India’s strict capital controls, migration of assets outside India remains a challenge. Advising migrating clients on navigating the complex tax and foreign exchange regime remains an important element of private wealth law in India.

Family Offices and Reverse Flips

As with individual migration, the restructuring of wealth ‒ in particular, for diversification ‒ remains a key topic of interest amongst India HNIs. Many Indian families have sought to create family offices (especially in Dubai and Singapore); this was supported by a liberalisation of the exchange control regime in 2022 to permit Indian non-financial companies to invest in financial services companies abroad without seeking regulatory approval. However, news reports suggest that the RBI is concerned with this trend ‒ although no official communication has been forthcoming. For this reason, the highly anticipated family investment fund (FIF) regime in GIFT City is also facing roadblocks as alluded to earlier.

While families look to find methods to diversify wealth abroad, there has recently been a noticeable reverse trend of Indian companies headquartered abroad relocating to India, resulting in significant value accretion here ‒ despite the potential of substantial tax outlay in India. Termed as “reverse flipping”, this move is primarily driven by the desire to capitalise on the booming Indian capital markets by listing on Indian stock exchanges for both primary and secondary funding rounds.

Rise of Family Settlements

Family businesses form the backbone of the Indian economy. However, as the next generation of family business leaders enters the boardroom, potential friction – both across and within generations – may arise, as is already noticeable in reports of a number of Indian business families facing disputes. This dynamic is likely to drive growing interest in settlements and governance planning among business families, aimed at ensuring harmony and stability.

Although courts have long recognised the concept of “family settlements” as a tax-neutral method of resolving disputes and preserving peace, there has been a recent increase in settlements among large Indian families for dividing the business among family members – either to resolve a dispute or to avoid potential disputes in future. Earlier in 2024, the Godrej family, promoters of one of the largest conglomerates, joined the ranks of others such as the Murugappa family and the TVS family by entering into a family settlement.

Tightening of Significant Beneficial Ownership Enforcement

Following recommendations of the Financial Action Task Force (FATF), the Companies Act 2013 was amended in 2018–19 to provide for mandatory disclosures of significant beneficial ownership (SBO) of companies. The past year has seen notices and enforcement actions by the Registrar of Companies (RoC) against large companies such as LinkedIn and certain Samsung subsidiaries for alleged violations of the SBO regime. Individuals who are beneficial owners of Indian companies should re-examine their SBO compliances in light of this increased vigilance.