To minimize tax liability, identify the ways and means to reduce the overall tax paid. Few tax saving schemes can help entrepreneurs reduce their tax liability.
The Income Tax Act 1961 lays down regulations for calculating net tax liabilities for entrepreneurs and people in business. They should look for potential expenditures right at the beginning to avoid further complications during an assessment.
10 Smart Tax Saving Ideas for Entrepreneurs
Tax planning for new business aims to reduce the overall tax burden. Here are some standard tax saving tips and options that allow entrepreneurs to minimize their tax liabilities:
Hire your family members and relatives
Hiring one’s family members is one of the best ways to save tax. This works especially when any member of the family is unemployed. The entrepreneur can pay them salaries based on the income tax slab rates.
Since the income of up to Rs. 2,50,000 is non-taxable, payment made to a family member reduces the tax liability of entrepreneurs. Moreover, when companies pay employers their salary, they can deduct it from their overall taxable income. This allows them to fall on the lower spectrum of income tax for small businesses.
Travelling and accommodation
Expenses incurred for traveling and accommodation are deductible. For example, entrepreneurs using vehicles or other means of transport for work purposes can deduct the expenses from their annual taxable income to earn tax rebates.
The traveling and accommodation include expenses for travel in cars, trains, etc., apart from driver’s charges and toll taxes. This also includes parking fees and costs of accommodation for legitimate business travels.
Invest more in marketing
The IT laws state that expenses made for digital marketing are eligible for tax deductions. Thus if entrepreneurs employ digital marketing techniques for their business, they can enjoy tax benefits on the expenses.
The constant digitalization has influenced marketing techniques, and it helps reach more customers than traditional marketing techniques. Entrepreneurs can thus utilize their surplus amount for digital marketing and enjoy tax benefits.
Deduct business utility expenses
Entrepreneurs who incur utility expenses can claim deductions against them. Such expenses include parking fees, expenses incurred on phones, vehicles, etc. If a business owner operates from their home, the electricity charges are eligible for deduction.
Purchase a medical insurance policy.
Medical insurance premiums are eligible for a tax deduction. Entrepreneurs can deduct the premium paid from their gross income to reduce their taxable income. Section 80D of the Income-tax Act extends tax benefits for entrepreneurs and their immediate beneficiaries. However, their employment in any other registered office will nullify this benefit.
Correctly deduct tax at source
Entrepreneurs may face an additional tax burden if they fail to deduct TDS when purchasing a commodity or service. For example, let’s say that Ravi fails to deduct TDS from the amount of commission paid to his agent. In this case, he will not be eligible for tax deductions.
Entrepreneurs can benefit from tax deductions by donating to a genuine cause. Thus, if one plans to donate Rs. 1,00,000 to the PM’s relief fund, he gets an additional tax deduction. However, entrepreneurs must secure an appropriate receipt for donations to be eligible as deductions.
Avail tax benefits on housing loans
As per Section 80C of the IT Act, the principal portion of the home loan EMI that an individual pays is eligible for tax deduction. However, this requires the entrepreneur to link his PAN with his company. There are other tax benefits on home loans as per the IT Act that business owners can claim to reduce their tax liability.
As per Section 35AD of the Income Tax Act, entrepreneurs, can enjoy tax deductions on the depreciated value of machinery. The standard depreciation rate is 15%, and a further 20% is allowed for new equipment.
Entrepreneurs involved in manufacturing can get tax deductions against the cost incurred for installing new machinery.
Carry out digital transactions
The Income Tax act prohibits payment of more than Rs. 20,000 in cash. Transactions above Rs. 20,000 are nullified, and those entrepreneurs may face unnecessary hassle. However, taxpayers are eligible for tax deductions for all payments made via bank transfer or online facility.
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Tax saving can be highly beneficial if the entrepreneur knows how to do it correctly. The government has introduced several tax-deduction mechanisms for individuals and entrepreneurs alike.
Frequently Asked Questions
How can tax rates determine the success rate of an entrepreneur?
Tax rates are significant hurdles for an entrepreneur and the business risks already involved. Higher tax rates will mean lesser profits. However, an entrepreneur should always aim to take advantage of the best tax-saving schemes.
Can individuals get tax benefits on long-term capital gains earned from shares?
Long-term capital gains of up to Rs. 1 lakh earned from the sale of shares or equity-oriented mutual fund units are tax-exempt.
For how many years can entrepreneurs get a tax holiday?
The Income Tax Department allows 100% exemption for all entrepreneurs during the first three years of their operation to boost business. However, the companies must be registered in innovation, development or commercialization, etc., to be eligible. Additionally, they might need to pay a minimum alternate tax on their book profit.
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