Tax Planning Strategies for Small Business Owners in India

Since income tax is one of the most challenging aspects to understand, we have listed a few tax planning strategies for SME owners in India.

Tax Planning Strategies fo Business Owners

Reetu | Jan 31, 2024 |

Tax Planning Strategies for Small Business Owners in India

Tax Planning Strategies for Small Business Owners in India

All entrepreneurs must pay income tax on their revenues through the e-filing portal. Sometimes, it can be a substantial sum, and there are several exemptions and deductions to reduce SME owners’ tax liabilities. Since income tax is one of the most challenging aspects to understand, we have listed a few tax planning strategies for SME owners in India.

Hire Your Relatives and Family Members

Hiring your relatives and family members is one of the most significant tax-saving steps. You can pay them salaries just like other employees. If they don’t have any other income source, you can pay them a salary of up to Rs 2.5 Lakh in a year. While it will not make them liable to direct tax, you can also reduce your taxable income by showing their salary as a cost to your company.

Claim Deductions on Travelling and Accommodation

As a business owner, you might need to travel frequently for business purposes. So, the next time you travel, book your tickets and hotels at your company’s expense instead of your personal account. Since you can show them as a business expense, they will not be part of your taxable income.

Invest in Marketing

Are you still using traditional marketing methods? It’s time to implement digital strategies to reach more customers and increase profitability. Simultaneously, it will also benefit your business from the tax perspective, as business marketing expenses are tax deductible. So, it would be a great idea to increase your marketing budget.

Pay for Business Utilities

If you use your phone or vehicle for business purposes, show them as utility expenses and claim tax deductions on them. These include your phone, car, driver’s salary, parking charges, internet charges, etc. If you operate the business from home, you may also claim deductions on electricity expenses. Mention them when filing your ITR at the e-filing portal to obtain tax benefits.

Buy Medical Insurance

Medical insurance premiums up to Rs 25,000 are tax deductible under Section 80D of the Income Tax Act, 1961. You can also cover your spouse, parents, and children under this. However, the deduction does not apply if you also hold a full-time job where your employer provides medical insurance.

Carefully Deduct TDS

As an entrepreneur, you must deduct tax at source when purchasing a product or service from a seller. Failing to do so will make the expense non-admissible and increase the tax burden. For instance, if you pay Rs.3 Lakh to an agent and do not deduct 10% tax at source, the whole Rs.3 Lakh will become taxable.

Donate

Donating money to a good cause provides inner satisfaction and leads to tax benefits. Donate to registered funds and charities like PM’s Relief Fund to save direct tax with donations. Donating to a political party also provides tax breaks.

Take a Home Loan

Apart from providing financial benefits, taking a Home Loan is also beneficial from the tax perspective. Moreover, you will build a long-term asset, and its value will significantly appreciate over time. Link your PAN with the company and claim a tax deduction of up to Rs.1.5 Lakh a year under Section 80C of the Income Tax Act.

Claim Depreciation

You are eligible for additional tax benefits if your company operates in the manufacturing sector. Under Section 35AD, you can claim up to 20% more depreciation than regular by installing new machinery and equipment in your facility. However, you must claim the extra 20% depreciation in the year of purchase only. Otherwise, it will become taxable.

Pay Staff Salaries Digitally

Since the Indian government largely favours building a cashless economy, avoid cash transactions as far as possible and handle them digitally. For instance, paying staff salaries in cash will also bring you in the eyes of the Income Tax Department. If you pay more than Rs.20,000 cash to an individual in a single day, the Income Tax Department will nullify the transaction and increase your taxability. Hence, always pay your staff salaries through bank transfers.

Conclusion

Even small deductions when filing returns on the e-filing portal can save money. While several tax-saving options are available for small business owners, you must use them to minimise your tax burden. Claiming tax deductions will help you save considerable money and bring you to the good books of the tax department.

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