Income tax is the harsh reality that every entrepreneur or a business owner has to accept.
And of course, the hardest thing to understand in this world is income tax!
However, it is our duty to 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 by which 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. Other expenses such as electricity costs can be claimed if one is working from a home office.
These can reduce the tax burden for entrepreneurs and their start-up.
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 is deductible under section 35D of Indian Income Tax Act.
It is recorded as the preliminary expense in the company’s book and can be deducted from the taxable income over 5 years, equally.
If the entrepreneurs use phone or vehicle for the purpose of the business, expenditure on these can be deducted as business expenses from the company’s book.
From the phone bills to the driver’s charges or even the parking fees can be accounted under the company’s expense.
If someone is working from home for his or her start-up, the electricity consumed for work purpose can be shown under the expense ‘head of company’.
This is helpful for the start-up to reduce their tax burden. Wi-Fi or internet charges, rent costs are also deducted for calculating taxable income.
4.Depreciation Expenses on Assets
Depreciation on all capital expenses can be deducted as an expense from the income of the firm.
If you make all the capital expenditure in the company’s name, you can claim depreciation on them as well which will reduce 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 then no one can understand it better than you.
So, one thing that you can consider doing is that, do not spend the expenses involved in traveling 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 traveling expense, then you can show 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 entrepreneur for tax deductions.
This is deductible under Section 80D of 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 those business owners for whom the start-up is a second job, and they hold a full time job where their employer gives them medical insurance premium already.
One of the best ways to reduce tax burden for entrepreneurs, is to hire members of their family to start-up and pay them a salary as a regular employee.
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 him/her and at the same time, helps to grow the business.
There are some specific transactions under Indian Income Tax Act which requires the buyer or the service receiver to deduct tax at source while making payment to the seller or the service provider.
If a person fails to do so, then 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 in the midst of 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 techniques of marketing, you can grow your business to many folds and reach out to the new customer base at faster pace.
Secondly, all the expense involved in marketing is tax-deductible. so, you can save money on this as well.
Therefore, the surplus that you will be left with at the end of the year, you can invest it in marketing and advertising for your start-up and save tax.
Indian Income tax department won’t allow any cash transaction in your books account for payment of tax if the maximum daily limit of ₹20,000 exceeds to 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 excess amount than the standard you would have paid otherwise. Thus, it is always better to make bank transaction 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 a new equipment or a machinery is installed during the year, then in addition to the normal depreciation, such units are also eligible to claim additional depreciation 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 a new machinery and claimed normal depreciation @15%, if you have forgotten to claim an additional depreciation @ 20%, then you have paid extra taxes on that 20%.
You have also lost the chance to claim the expense since the deduction of additional depreciation is available only in the first year.
Donating is a special way of saving your money on tax where you are performing a good deed and and at the same time can save money on tax.
But remember, only donations to registered charities will allow you to save tax. You can donate to PM’s relief fund, political parties or registered charities in order to get 100% tax relief.
Also, if you donate something in the form of tangible materials, then you won’t receive any kind of tax benefit.
And remember, to avail tax benefit, retain the receipt of your donation with you.
If you think that availing 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 start-up, then you can avail 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 deduction up to ₹1,50,000 per year, and you can include the interest of housing loan under this part of deductions.
Every penny saved is a penny earned!
It’s very important for an entrepreneur to record every small transaction in a start-up in an appropriate manner. They can even use the software to record and keep track of their expenses in an organized way.
Apart from the above-mentioned hacks, 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.
Disclaimer: The views expressed in this post are that of the author and not those of Groww