Best Tax Saving Tips – Strategies for Small Business Owners

For running your own business in India you require a string of statutory compliances and remember to pay the attached fees and taxes. Even after the implementation of GST a couple of years back, the Indian taxation system remains complex as ever and your business ends up paying a significant amount in taxes to the government.

For any business, although revenues matter a lot, however it is the net income after deduction of all the taxes, is the profitability determined. Hence, it is essential to follow practices that enable entrepreneurs to save on tax expenses and ultimately increase profitability of their businesses. Income tax for small business in India can be too harsh for budding entrepreneurs. If you want to know how to save tax in partnership firm, or a private limited company or even a small business. Today, we are sharing 5 tax savings tips for Indian business owners, including best practices to show you how to save taxes and help you earn more from your business venture.

What is business tax planning?

Business owners efficiently operating their businesses often end up figuring out the niti grities of running their venture, however poor tax planning and inefficient use of tax deductions, end up decreasing the net profits substantially as a major chunk is paid to the government in the form of taxes. The process of identifying and utilizing tax breaks, and deductions to make the taxation process efficient and simple while paying less in taxes by leveraging tax rules efficiently is called business tax planning.

Taxes for small business more often than not make the business ideas and opportunities less lucrative, considering the fact that these small businesses start small and have limited resources, small business taxes do not help the cause of starting a small business. 

If you are wondering how to save tax in business in India? There are plenty of tax saving tips available. You just have to understand these tax saving ideas and identify if you can implement these ideas in your current taxation or not. If yes, then these tax saving tricks can help you save massive amounts of money.

Claiming  benefits on a housing loan

The government allows individuals to deduct the interest paid on housing from their income, effectively decreasing their income by the amount of interest paid while repaying the loan taken for building or acquiring a residential property. If you have an active home loan, you can claim its interest to be a deduction from the house property and claim the principal as a deduction under Section 80C (limited to a maximum of Rs. 150,000).  This will effectively reduce your overall taxable income by reducing your ‘income from house property’ in ITR.Let’s take an example to understand this in a better way, let’s suppose you have an active home loan, and your monthly EMIs have interest component too, this interest component amounts to a total of INR 1 lac in the financial year. In this case if you decide to claim housing loan deduction in income tax, your taxable income will decrease by INR 1 lac and you’d be liable to pay income tax on your net income, i.e, income earned minus INR 1 lac. This, allowing you to save money on tax payable to the government.

Electronic payment of municipal taxes

You can also claim the taxes paid to your municipal corporation or municipality as deductions under income from house property. You simply need to keep a record of the payments and a copy of the receipts. Electronic payment of municipal taxes ensures that your bank account has the necessary proof in case you damage or lose the receipts.Also, electronic payments not only help with reconciliation but are also extremely convenient and fast. You no longer have to worry about the transit time, i.e. take taken to process the payment in case you’re making the tax payment using manual offline payment methods like via cash or cheques, You can also pay the due taxes on the due date and use your money efficiently. You no longer have to worry about paying taxes a couple of days in advance, all thanks to quicker payment, acknowledgement, and easy reconciliation.

Switch to smart and efficient accounting

Since most small businesses in India are labor-intensive enterprises, they are used to pay wages in cash. Sometimes, as much as 40% of a small business’s manufacturing expenses may be going into direct and indirect wages. If your business fails to keep track of these expenses, then your profit margins increase because of unrecorded entries in your expenses account and you are liable to pay more taxes. So if you have been neglecting bookkeeping for a while now, it is time to take a closer look at the state of affairs in your accounts department. You can also take the help of free accounting software to make matters easier.

Furthermore, efficient accounting helps manage the expenses efficiently and allocate resources in a more efficient and effective manner. With smart accounting you can take advantage of accounting principles to minimize payable taxes. Leveraging accelerated depreciation of assets among other principles helps you show more expenses in the initial years to minimize profits and end up paying low taxes. Always remember, smart and efficient accounting can make your business look more efficient and help you with taxes, loans, other debts, and manage receivables and payables as well as maximize or minimize profits on books (whatever suits your cause)!

Claiming Additional Depreciation

The Income Tax Act allows a claim of additional 20% depreciation on new machinery installed during the year. The provision is meant for the benefit of certain notified industries under Section 35AD and it is only applicable for the first year of a new machine or equipment’s operation. By claiming the additional depreciation @20% you can claim save that amount as expenses incurred.

Let’s assume you have acquired machinery that will help produce materials for your business, the cost of that machinery being INR 5 lac and expected lifespan of that machinery being 10 years  after which it will be rendered useless. Ideally the cost of that machinery divided by its useful life of 10 years should be INR 50 thousand per year. However, accounting principles allow you to depreciate the machinery in an accelerated way, i.e. in your accounting books, you can show the depreciation for the machinery as for example INR 1 lac every year for the next 5 years. With this method, you’d be able to maximize the cost and minimize the income from the business, effectively saving you tax on the additional INR 50 thousands for 5 years. The depreciation can however be only charged upto its depreciable amount. Using such efficient accounting methods while staying totally compliant with tax laws is a great way to save on taxes!

Deducting TDS

There are certain transactions that require you to deduct the tax at sources, such as payments made as commissions to your business agent or a freelance employee. If you fail to deduct the TDS the whole amount becomes inadmissible for claiming tax rebates. So make sure that you keep track of all such transactions and deduct tax @10% for them.

For any products and services that you buy from another business, you pay a tax component in the form of GST, more popularly known as tax deducted at Source (TDS). This TDS is tax deductible while claiming expenses for your business. Make sure you have the receipts for whatever products and services you bought to ensure that you’re able to deduct TDS paid earlier while paying taxes. Businesses use this method actively, while availing a product or service, businesses can give their GST number for input tax credit to save on taxes and avoid double taxation. This is a great method to save on taxes and use money efficiently.

5 Tax Saving Tips for Small Business Owners in India FAQs: