India’s personal tax policy has undergone a significant transformation— from a “save and deduct” model to an “earn and spend” regime. The new tax framework reduces rates while eliminating most exemptions, prioritising simplicity over incentivised saving. This change compels taxpayers to reconsider conventional moves beyond traditional tax-saving instruments and adopt legitimate legal structuring for optimal strategies to manage their personal tax liabilities.

Shift from deductions to structuring

The new regime eliminates most exemptions — such as Sections 80C, 80D, HRA, and LTA — but compensates with reduced tax slabs. Notably, individuals earning up to ₹12 lakhs now face no tax liability owing to the increased rebate of ₹60,000. For salaried taxpayers, income up to ₹12.75 lakhs attracts zero tax after factoring in the standard deduction of ₹75,000.

As per FY 2023–24 filings, 72% of taxpayers opted into the new regime. With Budget 2025 extending no fresh incentives under the old regime, this transition appears near complete. In this context, the paramount consideration is legal structuring rather than deductions to optimise tax efficiency. This includes the strategic use of HUFs, trusts, and NRI planning.

HUFs as separate taxable units

Hindu Undivided Family (HUF) is a recognised tax entity under Indian law. It can hold ancestral property, run a business, and invest, all while availing a separate basic exemption and slab rate. Permissible activities include owning real estate (including let-out property), earning capital gains, interest income, or carrying on ancestral business.

In HUF, a proper documentation is essential — unsubstantiated voluntary transfers from the karta without substantiation may be attributed to individual income (Section 64). Gifts from relatives are tax-exempt under Section 56(2)(x), thereby enabling corpus creation.

However, the possible implementation of a Uniform Civil Code (UCC) could alter this landscape. The UCC aims to unify inheritance and personal laws across all religions. Since the HUF structure draws its legitimacy from Hindu personal law, it could lose its separate tax identity if the UCC eliminates religion-based frameworks. This may necessitate either a revision in the Income-tax Act or phasing out of HUFs altogether — which would affect lakhs of families currently benefiting from this structure. Families dependent on HUFs for tax or estate planning can proactively explore alternatives like private trusts to ensure continuity under a uniform regime.

Trusts for tax deferral and control

Interestingly, private irrevocable discretionary trusts are increasingly being used by 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 may 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.

Views are personal. The article is authored by Rahul Charkha, partner and Nishit Shah, principal associate, Economic Laws Practice.