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As a small business owner, it’s crucial to understand the different tax-saving strategies available to you. By leveraging tax deductions and exemptions provided by the government, you can reduce your tax liability while retaining more money in your business.
However, the Indian taxation system is complex. And navigating it can be daunting for small business owners, especially if you’re just starting out. But worry not.
In this blog, we’ll discuss several tax-saving tips for small business owners that will help you minimize your tax liability and maximize profits.
Maintaining a cash expenditure account is one of the best tax-saving methods to claim most of your expenses as deductions. This is because the existing regulations in the Income Tax Act allow small businesses to save tax by noting down their expenses.
You only need proper maintenance of records and receipts for such tax-saving methods. However, many small businesses overlook minute expenses. While they may be negligible, you must still produce them for tax deductions.
As a small business owner, you will have to make regular payments to vendors and suppliers. While most of these payments may be in bulk to get a discounted price, buying supplies or raw materials in separate slots is also worth considering.
This is because you do not get a tax deduction if your payments exceed Rs. 20,000 per day. So, for instance, if you make regular payments of Rs. 40,000 to your suppliers, consider splitting the payment over two days, or reduce your order quantity to meet the requirement.
This can be a beneficial tax-saving tip, especially if you’ve exhausted most other ways to save tax.
Another helpful tax-saving tip is to show proof of existing loans. If you have taken a home loan, you can use it to claim a tax deduction. Section 80C of the IT Act allows you to claim a maximum deduction of Rs. 1.5 lakhs under the “income from house property” section.
To give more incentives to small businesses, the income tax department encourages them to file returns on time. This is an excellent tax-saving idea to avail of deductions and avoid late payment penalties. But that’s not all.
Paying your taxes on time is an excellent tax-saving idea as it allows you to carry forward your losses during a financial year. The income tax department allows you to carry forward this loss for 8 consecutive years and set it off against the income you earn during this period. But to avail of this benefit, you must file your ITR on or before the due date.
If you’re a small business owner of a manufacturing company, you’re in luck. As your machinery and equipment depreciate yearly, you can avail of tax deductions simply because of their age. You can also claim further deductions based on the wear and tear of the machines.
So you can claim a normal depreciation of 15% for your assets each year. You can also claim an additional depreciation of 20% if you add new machinery in a particular year.
In an effort towards a more digital nation, the government incentivises small business owners who adopt digital practices. With the presumptive taxation scheme, businesses that take digital payments can report 6% of their turnover as taxable income.
This can be a massive benefit if your business makes higher profits and needs to pay more taxes.
Section 80C of the IT Act allows you to claim deductions up to Rs. 1.5 lakhs in a financial year by contributing to different schemes. For instance, you can claim tax deductions on insurance premiums, public provident fund (PPF), tax-saving fixed deposits, ELSS, etc.
You would have incurred expenses even before registering your small business. These “initial expenses” include stamp duty charges, filings, articles and memorandums, and more.
Section 35D of the IT Act allows you to deduct these initial expenses in five equal installments and claim a deduction in the first five years of your business.
By using these tax-saving tips for small business owners, you can save more money and use it to grow your business. But handling taxes while dealing with financial crunches can be challenging. If you’re looking to expand your business or need funds to invest in tax-saving instruments, consider getting a business loan.
With Tata Capital, you get a reliable partner with flexible repayment schedules and easier processing times, ensuring your small business grows quickly. So get in touch with us today.
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