As the next financial year was approaching, Kunal got worried because he is a business owner and he has to provide the proof of his tax savings or pay the entire year’s tax. Kunal’s small business was yet to make a mark in the market and he wasn’t prepared to pay the huge amount as a tax. So, he was trying to find out ways to reduce his business’s tax liability.
Kunal’s research ended up with 3 valuable and legally sound lessons which can benefit all young entrepreneurs.
1. Never mix up your personal expenses with business expenses.
The laws of Indian tax system provides tax deductions for the expenses that are incurred solely for the business purposes like the administrative and general expenses, business related travel and employee benefits. During the tax liability calculation, the expenses are subtracted from the business’s income before it is subjected to taxation. But, most of the time, business owners often confuse themselves and hence they lose the opportunity of tax deductions.
Therefore, it is extremely important to treat your personal expenses separately from your business expenses and maintain a list of records in the company’s database. Doing this regularly can save you a lot of tax.
2. A business loan can help you save a great amount of tax.
Business loan can be used for various purposes like in maintaining inventory and equipment which can be very crucial at times especially if your business is in its early stage. Well, that’s not it, the interest paid on a business loan also comes under business expense and hence this invites tax deductions. But there are 2 factors to consider here.
- Interest should not be paid to a person who is related to the business by any means. If the interest is already paid to such person, the tax officer has the authority to allow or disallow the deduction based on the amount of interest.
- Loan’s interest taken to buy/build an asset is not tax deductible until and unless the asset has been put to use. Suppose you have taken a loan for the construction of a new factory that will be ready in the next 5 years, then you won’t be getting any tax deductions on the interest during that tenure of 5 years. The interest paid after the factory has started its business will be eligible for deductions.
3. The Government of India offers various tax deductions for young businesses.
The Indian law provides a massive amount of tax-saving provisions for the young and startup businesses so that they should not get discouraged to take their initial step. The amount spent during the setting up of a new base before or soon after starting a business comes under tax deduction.
To encourage new ventures, the Government of India’s initiative of Startup India campaign contains further benefits and deductions. The eligible start-ups can claim a full tax deduction on the profits earned in any 3 consecutive years out of first 5 years.
To check if your company meets the eligible criteria, visit the Startup India’s website: “www.startupindia.gov.in“.
What does all this mean?
Tax laws can look complex and harsh at first, but if you understand it closely, they are quite convenient. You can use your simple tactics to save massive amounts of tax on your business earnings. And yes, all the above-mentioned ways are perfectly legal.