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Investing Abroad Through Limited Liability Partnerships: An Unconventional Route for India’s Wealthy

The recent hike in the Tax Collected at Source (TCS) rate from 5% to 20% in Budget 2023, along with the existing cap of $250,000 on remittances under the Liberalised Remittance Scheme (LRS) in India, has made overseas investment challenging for the common citizen. However, for the nation’s high net-worth individuals (HNIs) and wealthy families, a loophole exists in the form of Limited Liability Partnerships (LLPs).

LLPs are permitted to invest abroad through Overseas Direct Investments (ODI) and Overseas Portfolio Investments (OPI). While ODI is limited to four times the LLP’s net worth, OPI is capped at 50% of the LLP’s net worth. Neither of these is subject to the usual $250,000 cap or the 20% TCS.

Incorporating an LLP requires at least two partners, who can then infuse their money into the LLP to invest in overseas stocks. This LLP is considered an ‘Indian entity’ by the Reserve Bank of India (RBI), and thus not subject to standard LRS rules or the TCS on remittances exceeding ₹7 lakh.

The taxation for LLPs is at a flat rate of 30%, without the benefits of slab-wise taxation that individuals enjoy. However, since an LLP’s surcharge rate is flat at 12%, the highest effective tax rate would be around 35%, whereas for individuals it may exceed 42% in some cases. Thus, the tax impact tilts in favor of an LLP at incomes of about ₹2 crore, making this an attractive option for HNIs.

This method also offers a route for investing in overseas private equity/venture capital funds. However, LLPs are restricted from investing in overseas real estate, gambling, or entities that invest in India. Some derivatives and crypto companies can be accessed through this intermediate holding entity.

The government has further introduced a new entity—Family Investment Fund (FIF)—in GIFT City. Wealthy families can use LLPs to fund an FIF in GIFT City, bypassing the conventional LRS cap. A tax holiday of 10 years applies to such FIFs, although this might be challenged by the income tax department.

Though this method of investment through LLPs seems beneficial for the wealthy, the minimal costs of incorporation and annual requirements of reporting to RBI must be kept in mind. Experts also caution that this RBI loophole could be closed in the future, so compliance with all norms is essential.


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