Reduce the Tax Burden Legally and Strengthen Your Business Finances

[Siddarth]

Entrepreneurs face the challenge of paying income tax as part of revenue generation. While navigating tax obligations can be complex, it is possible to minimize tax liability legally. By adopting effective tax-saving strategies, business owners can significantly lower their tax burden and enhance their financial stability. Exploring expert-backed tax planning techniques can lead to long-term benefits for any venture.

Leveraging Business Operations for Maximum Savings

Many of your daily business activities hide potent tax deductions. The key is meticulous record-keeping and strategic planning.

• Preliminary expenses incurred before starting a business are deductible under Section 35D.
• These expenses can be deducted in five equal installments over five years.
• Home office owners can claim proportionate household costs for business use.
• Vehicle and phone expenses related to business are also deductible.
• Business travel expenses must be booked through the company to be deductible.
• Proper documentation is required for travel-related deductions, such as fuel and accommodations.
• Capital expenditures help reduce taxable income for businesses.
• Depreciation on capital expenses is deductible from the firm's income.
• Manufacturing companies can claim up to 20% additional depreciation on new equipment.
• This additional depreciation must be claimed in the year the asset is put into use.

Strategic Financial and Personnel Moves

Strategic Financial and Personnel Moves
Optimizing your expenses often means making strategic decisions regarding hiring and marketing expenditures.

a. Strategic Hiring and Compensation

• Hiring family members can lower a company's tax burden.
• Salaries paid to family members count as business expenses, reducing taxable income.
• A hired relative without other income can earn up to Rs 2,50,000 tax-free.

b. Compliance and Transaction Discipline

• Entrepreneurs must deduct TDS when purchasing services/products as per the Income Tax Act.
• Non-compliance leads to inadmissible expenses, increasing tax liability.
• Example: A Rs 3,00,000 commission without TDS may result in full disallowance.
• Limit cash payments to avoid tax issues; a Rs 20,000 limit per person is recommended.
• Exceeding cash limits may lead to disallowed transactions by tax authorities.
• Prefer bank transfers for significant payments to ensure compliance.

c. Investment in Growth and Technology

• Increase marketing investment for tax deductions and faster customer reach.
• Utilize financial technology to streamline processes and enhance savings and productivity.
• Implement AI-driven Accounts Payable services for efficiency.
• Use MaxITC to optimize Input Tax Credit for better profitability.
• Adopt Clear Finance Cloud for automated finance processes and control.
• Leverage Clear Compliance Cloud for GST and tax compliance.
• Employ CimplyFive for automated secretarial compliance.

Navigating Compliance and Transactions

Staying compliant and making payments correctly are critical tax-saving strategies that prevent disallowed expenses and penalties.

• Deduct Tax at Source (TDS) to avoid inadmissible expenses and an increased tax burden.
• Non-deduction of TDS on payments can lead to significant expense disallowance.
• Limit cash payments to avoid disallowed transactions; use bank transfers for larger amounts.
• Cash payments over Rs 10,000 may be disallowed; some suggest a Rs 20,000 limit.
• Value short shelf-life inventory using the lower of cost or net realizable value.
• Consistent inventory valuation prevents overvaluation, aiding in tax reduction.

Personal Wealth and Loan Benefits

As an entrepreneur, your personal investments and loans can significantly lower your taxable income.

• Tax deductions are available for medical insurance premiums for yourself, your spouse, children, and parents.
• Claimable premium amount: up to Rs 25,000; a maximum of Rs 1,00,000 under Section 80D.
• Not applicable if covered by your employer's medical insurance.
• Housing loans offer tax advantages: principal repayment deduction under Section 80C (up to Rs 1,50,000).
• Interest deductions are available under Section 24 and additional interest under Section 80EEA.
• Donations to registered charities or political parties provide tax benefits; retain receipts for claims.

Advanced Structuring and Optimization Strategies

For professionals and business owners, there are powerful tools for income management.

a. Presumptive Taxation (Sections 44AD and 44ADA)

Presumptive taxation simplifies compliance and drastically reduces tax liability by assuming a fixed percentage of turnover as profit.

• Businesses with a turnover of up to 3 crore can benefit if 95% of receipts are digital.
• Digital receipts allow for declaring 6% of turnover as profit.
• Cash receipts permit declaring 8% of turnover as profit.
• Professionals can declare 50% of gross receipts as income under Section 44ADA.

b. Using an HUF as a Separate Entity

The Hindu Undivided Family (HUF) structure provides a robust tax planning tool, available only to Hindus.

• An HUF operates as a distinct entity with its own PAN and IT return.
• It benefits from tax slabs and basic exemption limits similar to individuals.
• Deductions under Section 80C and health insurance premiums are claimable.
• This structure is ideal for managing rental income, interest, dividends, and equity gains, helping to avoid high taxes.
• It assists in asset allocation and protects family wealth.

c. Capital Gains Tax Harvesting

• Book losses to offset realized profits and minimize taxable gains.
• Sell losing assets before year-end, then repurchase them the next day.
• This strategy allows losses to offset gains, thereby reducing tax liability.

In summary

Diligently record all business expenses with invoices for tax deductions. Use tools like Clear Finance Cloud or simple bank transfers. Plan your tax strategy regularly, not just in March. Understand provisions and structures, like HUF, to maximize deductions legally.