Income tax is the harsh reality every entrepreneur or business owner must accept.
And, of course, the hardest thing to understand in this world is income tax!
However, we must contribute towards paying income tax, and we can’t escape from this duty because it is ultimately a source of revenue for the government.
However, we can try to minimize our tax liability.
Let us consider the various ways one can save income tax in India for entrepreneurs.
Entrepreneurs who use their vehicles and phones for business purposes can show these as business or utility expenses.
Expenses for vehicles, tolls, phones, driver’s charges, parking, etc., can be claimed as business utility expenses if used for a legitimate business purpose. In addition, other expenses, such as electricity costs, can be claimed if one works from a home office.
These can reduce the tax burden for entrepreneurs and their startups.
Here are some of the business utility expenses you can use for tax-saving purposes:
The costs incurred before the commencement of the business unit are deductible under section 35D of the Indian Income Tax Act.
It is recorded as the preliminary expense in the company’s book and can be deducted equally from the taxable income over 5 years.
If the entrepreneurs use phones or vehicles for the business, expenditures on these can be deducted as business expenses from the company’s book.
The phone bills to the driver’s charges or parking fees can be accounted for under the company’s expense.
If someone works from home for their startup, the electricity consumed for work purposes can be shown under the expense ‘head of company’.
This is helpful for the startup to reduce their tax burden. In addition, Wi-Fi or internet charges and rent costs are deducted to calculate taxable income.
Depreciation on all capital expenses can be deducted as an expense from the firm's income.
If you make all the capital expenditures in the company’s name, you can also claim depreciation, reducing your tax burden.
Entrepreneurs have to move from one place to another due to various business-related work.
And if you are a business owner,, no one can understand it better than you.
So, one thing you can consider doing is not to spend the expenses involved in travelling or hotel booking from your account. Instead, file it to the company’s account.
If your salary is ₹20,00,000 and around ₹5,00,000 is the travelling expense, then you can show the travel expense as a business expense and pay tax for the amount left. i.e. ₹15,00,000 in this case.
Any medical insurance premium, to the tune of ₹25,000, can be claimed by entrepreneurs for tax deductions.
This is deductible under Section 80D of the Indian income tax act, and the insurance can be for the entrepreneur’s spouse, dependent parents, or dependent children.
But remember, this tax saving option will not be applicable for business owners for whom the startup is a second job and they hold a full-time job where their employer already gives them medical insurance premiums.
One of the best ways to reduce the tax burden for entrepreneurs is to hire members of their families to start up and pay them a salary as regular employees.
If this family member is not earning any other income, the company can pay them even ₹2.5 lakhs per year (with the current tax slab) without any tax outgo for this relative.
As this is a cost to the company, it can be set off from the taxable income of the company, thereby reducing the total outgo for the company.
This also benefits the entrepreneur by having trusted people around them and, at the same time, helps to grow the business.
Some specific transactions under the Indian Income Tax Act require the buyer or the service receiver to deduct tax at the source while making payment to the seller or service provider.
If a person fails to do so, such an expense becomes inadmissible and ultimately increases the tax burden.
In a year, you pay ₹3,00,000/- as commission to your business agent and don’t deduct tax @10% on the same. In such cases, the whole expense of ₹3,00,000/- shall be disallowed while calculating taxable profit.
We are amid the Digital Era where everything is going digital. So, you can dump the old way of marketing and go digital with your products and services.
It will benefit you in two respects.
Firstly, by trying new digital marketing techniques, you can grow your business many folds and reach out to a new customer base faster.
Secondly, all the expense involved in marketing is tax-deductible. So, you can save money on this as well.
Therefore, with the surplus you will be left with at the end of the year, you can invest in marketing and advertising for your startup and save on tax.
Indian Income-tax department won’t allow any cash transaction in your books account for tax payment if the maximum daily limit of ₹20,000 exceeds a single person.
if you are paying your workers more than ₹20,000 as wages on a single day in cash, then the transaction would be nullified by the income-tax department.
This will increase your tax burden, and not only that; you will be paying an excessive amount than the standard you would have paid otherwise. Thus, it is always better to make bank transactions while paying any price above ₹20,000 in a single day.
Indian Income-tax act provides multiple benefits to the entrepreneurs involved with manufacturing enterprises—for example, additional depreciation, specified business under section 35AD, etc.
In the case of a manufacturing enterprise, if new equipment or machinery is installed during the year, then in addition to the regular depreciation, such units are also eligible to claim additional depreciation of up to 20% in the year when the equipment or machinery is put to use.
Similarly, a separate section, section 35AD, was introduced, providing a total deduction of capital expenditure carried out by enterprises if they are engaged in businesses specified in this section.
The idea behind providing benefits under section 35AD was to encourage private sector investment in public infrastructure such as hospitals, cold storage, highways etc.
Say you have bought new machinery and claimed normal depreciation of @15%; if you have forgotten to claim an additional depreciation of 20%, then you have paid extra taxes on that 20%.
You have also lost the chance to claim the expense since the additional depreciation deduction is available only in the first year.
Donating is a unique way of saving your money on tax where you are performing a good deed and at the same time can save money on tax.
But remember, only donations to registered charities will allow you to save tax. So you can donate to PM’s relief fund, political parties or registered charities to get 100% tax relief.
Also, if you donate something in the form of tangible materials, then you won’t receive any tax benefit.
And remember, to avail of tax benefits, retain your donation receipt with you.
If you think that availing of a bank loan for building or purchasing a house for yourself will be problematic, you are on the wrong track.
Because if you have your pan card linked to your startup, you can avail yourself of a deduction on the interest you pay every month on your house loan.
Under section 80C of the Indian Income Tax Act, you can claim a deduction of up to ₹1,50,000 per year, and you can include the interest of a housing loan under this part of the deductions.
Every penny saved is a penny earned!
An entrepreneur needs to record every small transaction in a startup appropriately. They can even use the software to record and keep track of their expenses in an organized way.
Apart from the hacks mentioned above, there are many more avenues to save taxes, and government allows you to do so without evading taxes.
You must take the benefit of these tax deduction tips and make a proper tax plan according to the nature of your startup.