Tax planning and saving tips for small businesses and start-ups.
Taxing times!
It’s that time of the year again!
FY 2022-23 is drawing to a close, so plan your taxes before the financial year end and take required action now! Taxes can also be a significant expense for small businesses and start-ups if not planned well and efficiently. When it comes to individuals and proprietors there are several ways to reduce the tax liability and save money.
We have put together some handy tax tips based on our years of experience working with small businesses to help them get started.
1 – Use Section 80C to Save Tax:
By understanding the various provisions available in this section, businesses can smartly plan their taxes and save money. Here are some of the investments and expenses that are eligible for deduction under Section 80C:
Section 80C of the Income Tax Act is one of the most popular tax-saving options available to taxpayers in India. It allows individuals and HUFs to claim deductions on certain investments and expenses, up to a maximum limit of Rs. 1.5 lakhs per financial year. However, this section is not fully utilized by many and eligible investments are not made within the financial year, thereby missing out on the benefits.
Life Insurance Premiums – The premiums paid for life insurance policies are eligible for deduction under Section 80C. This includes policies taken for self, spouse, and children.
Employee Provident Fund (EPF) – The contributions made by the employer to the employee’s EPF account are eligible for deduction under Section 80C. The employee’s contributions to the EPF can also be claimed as a deduction under Section 80C.
Public Provident Fund (PPF) – The contributions made to the PPF account are eligible for deduction under Section 80C. The interest earned on the PPF account is also tax-free.
Tax-Saving Mutual Funds – Investments made in tax-saving mutual funds, also known as Equity-Linked Saving Schemes (ELSS), are eligible for deduction under Section 80C. These funds invest in equities and have a lock-in period of three years.
National Savings Certificate (NSC) – The investments made in NSC are eligible for deduction under Section 80C. The interest earned on NSC is taxable.
Tuition Fees – The tuition fees paid for the education of up to two children are eligible for deduction under Section 80C. This includes fees paid for school, college, and university education.
Other Deductions under Section 80C – Home Loan Principal Payment, Stamp duty and registration cost of the House, Tax Saving 5 years FD from Banks, 5 years Post Office Time Deposit (POTD), Senior Citizen Saving Scheme (SCSS), Unit Linked Insurance Plan (ULIP)
2 – Opting for a Lower Tax Rate under the Presumptive Taxation Scheme:
The Income Tax Act in India has introduced the Presumptive Taxation System via section 44AD, 44ADA and 44AE. Individuals, HUFs and partnership firms that have annual revenue of up to Rs. 2 crore can choose to pay tax on a presumptive basis under this programme, which allows them to report their income at 6% or 8% (as per conditions satisfied) without maintaining books of accounts. This scheme is not applicable to Limited Liability Partnerships and Companies.
3 – Taking Advantage of GST input Credit:
As per the GST law in India, GST paid on purchases is eligible for set off against the GST collected on sales. The business may also submit a GST refund application if input tax is higher than output tax. Businesses must make sure they are registered for GST and that their suppliers are registered in order to benefit from GST credits. Filing of monthly returns in Form GSTR 1 and 3B is mandatory for registered entities. With accounting software that complies with GST, firms may automate the calculation of GST credits and file their returns more quickly.
4 – Other tools and provisions
- Set off and carry forward of losses
In case of negative business profits, the Income Tax Act allows for carry forward of loss to subsequent years helping businesses and startups that generate negative profits in initial years. Certain conditions as per Income Tax rules need to be fulfilled especially filing of income tax return before the specified due date - Factor in Depreciation:
Depreciation is a non-cash expense, thus there is no actual cash outflow associated with it. However, for capital intensive businesses there can be a significant tax benefit on the annual depreciation amount. Hence it is important for businesses to factor in the depreciation and plan their income tax liability accordingly. - Contributions to employee benefit plans:
Deductions are available for contributions to schemes such as the Employee Provident Fund (EPF), the Public Provident Fund (PPF), and the National Pension Plan (NPS).
Health insurance premiums: Premiums paid for employee health insurance can also be claimed as a deduction. - Factor in Depreciation:
Depreciation is a non-cash expense, thus there is no actual cash outflow associated with it. However, for capital intensive businesses there can be a significant tax benefit on the annual depreciation amount. Hence it is important for businesses to factor in the depreciation and plan their income tax liability accordingly. - Contributions to employee benefit plans:
Donations to charitable organizations are deductible under Section 80G of the Income Tax Act. - Start-up costs:
Some expenses like as legal fees, registration fees, and marketing expenses, can be deducted in the early years of a business.
Conclusion:
It is said that, A rupee saved is a rupee earned!
While there are several tax-saving provisions available, it is only wise to make use of them and necessitates timely action. By implementing these tax planning and savings tips, small businesses and start-ups can not only save on taxes but also improve their overall financial health, enhance their competitiveness, and achieve their business goals.
At V. Purohit & Associates, we help businesses save on taxes and plan for the future. Feel free to contact us if you need any assistance.
