Entrepreneurs and business owners are accountable to pay income tax on the revenues generated. It is a hard reality that every entrepreneur or business owner has to accept the part of the revenue is paid to the government as tax.
This can be a sizable sum, and they are always in search of deductions and exemptions to minimize their tax reduction. However, we have 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.
Here are few tips that startups and entrepreneurs can follow:
Hire Family Members
Hiring family members can be an important step to reduce taxes. 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.
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 set off against the company’s taxable income, thereby reducing the overall tax outgo of the company.
Travelling and Accommodation
It is common for entrepreneurs to travel places for business needs. This is done more broadly 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 at 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.
Invest in Marketing
If you are still using the old ways of marketing, then it’s 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.
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 business purposes. 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:
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.
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. To save taxes by making donations, you need to donate to registered charities and funds such as PM’s relief fund. You can also donate to a recognized political party to claim tax breaks.
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, and you can include the interest of housing loan under this part of deductions.
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.
In this era of dealing with things digitally, it would not be wise to pay your workers in cash. Furthermore, you will be on 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. 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 beneficial in the long run.