Entrepreneurs and business owners are liable to pay income tax on the revenues generated by their venture. This can be a considerable sum, and they are always in search of deductions and exemptions to minimise their tax outgo. Income tax is one of the most challenging things to understand. We have covered the following in this article:
1.Hire Your Own Family Members and Relatives
Hiring family members can prove to be a significant step to reduce taxes. They can be paid salaries like the way other employees are paid. If the family members who get hired by the company have no other income, then the company can pay them just Rs 2,50,000 a year. This will ensure that they don’t become liable to pay taxes. Since the salaries paid to the employees is a cost to the company, it can be setoff against the company’s taxable income, thereby reducing the overall tax outgo of the company.
2.Travelling and Accommodation
It is common for entrepreneurs to travel places for business purpose. This is done more extensively if entrepreneurs have branches spread across several cities. If you are to save taxes, then from the next time you travel, book your travel tickets and accommodation on the company’s expense and not from your account. This is considered a business expense and can be deducted from the taxable income of the company.
3.Invest More in Marketing
If you are still using the old ways of marketing, then its high time that you implement digital marketing as it helps you reach out to more potential customers and thereby increasing the probability of finding new customers. This will also benefit you from the tax point of view as marketing expenses are eligible for tax deductions. Therefore, it is not a bad idea to increase the budget for marketing.
Business owners using their vehicles and phones can show such expenses are utility expenses. For instance, expenses on phones, vehicles, parking charges, driver’s salary, and so on are claimable if made purely for the business purpose. If you are operating your home, then electricity expenses are also claimable. This will help in reducing the tax burden.
The following are some of the business utility expenses that are claimable for deductions:
i) Preliminary expenses: All expenses made prior to the establishment of the enterprise are eligible for deductions under Section 35D of the Income Tax Act. These are recorded as preliminary expenses and deductible from the taxable income for five years.
ii) Convenience expenses: If you are extensively using vehicles and phones for the business purpose, then these expenses are deductible as business expenses under the company’s book.
iii) Regular expenses: If you are operating your company from home, then you can deduct electricity expenses under the ‘head of the company’. Furthermore, you can also deduct expenses incurred due to the internet connection and rent are also deductible.
Depreciation of all capital expenses is also eligible for tax deductions under the ‘income of firm’. You need to make capital expenditures from the company’s account and claim depreciation to reduce your taxability.
The premiums up to Rs 25,000 paid towards medical insurance can be claimed for tax deductions under Section 80D of the Income Tax Act, 1961. You can cover your spouse, children, and parents under this. This is not applicable if you run a startup in parallel to holding a full-time job where the employer provides medical insurance coverage.
6.Correctly Deduct Tax at Source
There are specific clauses under the Income Tax Act under which the entrepreneurs purchasing a service or product can deduct the tax at source when making payments to the seller. If an individual does not do so, then those expenses will not be admissible and will result in an additional tax burden. For instance, if you make a payment of Rs 3,00,000 as commission to an agent and fail to deduct the tax at the rate of 10%, then the whole of Rs 3,00,000 will not be allowed while determining the taxable profit.
Donating money gives you not only the satisfaction of doing a good deed but also tax benefits. In order to save taxes by making donations, you need to donate to the registered charities and funds such as PM’s relief fund. You can also donate to a recognised political party to claim tax breaks.
You’re mistaken if you believe that purchasing a house on a bank loan is not beneficial. It will be a long-term asset and can appreciate significantly over time and comes with tax benefits. You can claim tax deductions of up to Rs 1,50,000 a year under Section 80C of the Income Tax Act if you have linked your PAN with the company.
Companies operating in the manufacturing sector are given additional tax benefits. Companies (under Section 35AD) installing new equipment and machinery installed over a year can claim up to 20% additional depreciation in addition to the regular depreciation in the year they were put in use. For example, if you have purchased new machinery and claimed normal deprecation of 15% and you have not claimed additional deprecation of 20%, then you will end up paying taxes on the unclaimed 20%.
In this era of dealing with things digitally, it would not be wise to pay your workers in cash. Furthermore, you will be in the red list of the income tax department. If you are making payment of more than Rs 20,000 in a single to an individual in cash, then it is disallowed in your account books. For example, if you pay a worker more than Rs 20,000 in cash in a single day, then that transaction will be deemed null by the income tax department. Therefore, your taxability increases. Hence, it is always advisable to pay your workers through bank transfer.
A rupee saved is a rupee earned. When there are several tax-saving provisions, it is only wise to make use of them. Implementing tax-saving practices will prove to beneficial in the long run.