Tax Saving Tips for Entrepreneurs

10 Best Tax Saving Tips for an Entrepreneur in India

1. Business Utility Expenses

If you use your vehicle or phone for business, you can count those expenses as business costs. This includes things like vehicle expenses, tolls, phone bills and parking fees. Even electricity costs for a home office can be considered. These deductions can assist in reducing the amount you owe in taxes.

Preliminary Expenses

Any costs you have before officially starting your business can be claimed under Section 35D of the Indian Income Tax Act. You spread these expenses over 5 years to reduce your taxable income.

Convenience Expenses

 If you use your phone or vehicle for business purposes those costs can be deducted. This includes everything from phone bills to parking fees.

Regular Expenses

 If you work from home for your startup, you can claim expenses like electricity, Wi-Fi, internet charges and rent as business expenses. This decreases the portion of your income that is subject to taxation.

Depreciation Expenses on Assets

 Any capital expenses you make for your business can be claimed as depreciation. This means you can deduct a portion of the cost each year reducing your taxable income.

Overall, these deductions can help you save money on taxes and reduce your tax burden as a startup entrepreneur.

2. Travelling and Accommodation

As a business owner, you're often on the move for work reasons and you understand this better than anyone else. Instead of paying for travel expenses like hotels or transportation from your own pocket, charge them to your company.

Let's say your annual salary is ₹20,00,000 and you've spent ₹5,00,000 on business travel. You can treat this travel expense as a business cost which means you'll only pay taxes on the remaining amount which is ₹15,00,000 in this case. It's a smart way to manage your expenses and reduce your tax liability as a business owner.

3. Medical Insurance

If you're an entrepreneur, you can deduct up to ₹25,000 from your taxes for medical insurance premiums. This applies under Section 80D of the Indian Income Tax Act. The insurance can cover your spouse, dependent parents or children.

If you have a full time job with medical insurance provided by your employer you can't claim this deduction for your startup. It's only for entrepreneurs who don't have medical coverage through another job.

4. Hire Your Own Family Members and Relatives 

One effective way for entrepreneurs to cut down on taxes is by hiring family members to work for their startup. They can pay them a salary just like any other employee. If this family member doesn't have any other income the company can pay them up to ₹2.5 lakhs per year without any tax implications for them. 

Since this salary counts as a business expense it reduces the taxable income of the company. This means the company ends up paying less tax overall. 

Plus having family members on the team can provide a sense of trust and reliability for the entrepreneur. It's like having familiar faces around while growing the business. So, it's a win win situation for both the business and the family members.

5. Always Deduct Tax at the Source 

Some transactions under Indian tax laws require you to deduct tax when you pay someone. If you forget to do this the expense won't count for tax deductions. 

Let's say you pay ₹3,00,000 as a commission to a business agent but forget to deduct the required 10% tax. In this case, the entire ₹3,00,000 expense won't be considered when calculating your taxable profit. So, it's important to remember to deduct tax at the source to avoid increasing your tax burden.

6. Spend the surplus on marketing 

In today's digital age everything is moving online. So, instead of sticking to traditional marketing methods consider going digital with your products and services. This has two major benefits.

Firstly, by exploring new digital marketing strategies, you can expand your business and connect with a wider audience much faster.

Secondly, the beauty of digital marketing is that all the expenses involved are tax deductible. This means you can save money on taxes while investing in marketing.

So, if you have some extra money left at the end of the year consider putting it into marketing and advertising for your startup. Not only will it help your business grow, but it will also reduce your tax bill.

7. Avoid Cash Transactions

Indian Income tax department has a rule, if you're making cash transactions of over ₹20,000 in a single day, they won't count it for tax purposes. Let's say you pay your workers more than ₹20,000 in cash on one day. The tax department won't accept that transaction. 

This can actually make your tax bill higher because you won't be able to deduct those payments. So, it's smarter to use bank transactions for payments over ₹20,000 in a day. That way you can avoid extra taxes and stick to the standard payment process.

8. Depreciation

Indian Income tax Act offers perks for manufacturing businesses. For instance, when a manufacturing business buys new machinery, it can claim extra depreciation of up to 20% on top of the regular depreciation in the first year of use.

There's also Section 35AD which allows businesses in specified sectors like hospitals or highways to deduct the total capital expenditure.

These benefits aim to encourage investment in vital sectors. If you buy new machinery and only claim regular depreciation you might miss out on the extra 20% depreciation available in the first year. This means you'd pay more taxes than you need to.

It's important to remember to take advantage of these deductions in the year you buy the equipment because they're usually only available in that first year.

9. Save Tax by Donating 

Donating is a great way to do good and also save on taxes. But there are some rules to follow. You can only get tax benefits if you donate to registered charities. So, whether you're giving to the political parties, PM's relief fund or other registered charities you can get 100% tax relief.

It's important to note that if you donate physical items instead of money, you won't receive any tax benefit for that. And to make sure you can claim the tax benefit keep the receipt for your donation safe. That way, you have proof of your charitable contribution when it's time to file your taxes.

10. Housing Loan

If you're worried about taking out a bank loan to buy or build a house there's good news if you have your PAN card linked to your startup. You can actually get a deduction on the interest you pay each month on that home loan.

According to Section 80C of the Indian Income Tax Act, you can deduct up to ₹1,50,000 from your taxable income every year. And guess what? You can include the interest you're paying on your housing loan in this deduction.

So, if you're thinking of investing in a home don't worry too much about the financial side of things. With this deduction you can save some money on your taxes while making your dream of owning a home a reality.
 

Conclusion

Keeping track of every expense no matter how small is crucial for entrepreneurs. Using software can help them organize and monitor their expenses efficiently.

In addition to the tips mentioned earlier there are plenty of other ways entrepreneurs can save on taxes all while staying completely within the law.

It's essential to take advantage of these tax saving opportunities and tailor a tax plan that fits your startup's specific needs. By doing so, you can maximize your savings while responsibly fulfilling your tax obligations.