Tax saving options for self-employed/small business units and start ups

In today’s scenario where, doing business has become more stringent due to the mandatory requirement of complying with multiple & complex laws, taxation law is something you should outsource to an expert. Taxation laws not only in our country, but all over the world are complex and not everyone’s cup of tea. As a business owner, you have income from almost every head except from the head ‘Income from Salaries’. If you are not aware of tax saving options, you might end up paying significant amount of taxes to the government every year.

Income from House Property
Claim benefits of interest on housing loan
Some people avoid availing bank finance for building houses, but the fact is that availing home loans can be beneficial in many ways. From the tax point of view, you can claim an interest as a deduction from house property under Sec 24 upto Rs 200000 per annum and claim principal as a deduction under section 80C along with other deductions which are limited to a maximum of Rs 1,50,000/-. Gross value for tax purposes is taken as NIL and claiming deduction results in loss under the head ‘Income from house property’ and can be set off against incomes of other heads resulting in lesser overall taxable income.
Pay municipal taxes by cheque
Municipal taxes paid during the year can be claimed as a deduction from income from house property. People often pay municipal taxes in cash and do not keep a copy of receipts of the same. However, making payment of municipal taxes allows you to claim its deduction and can be claimed even if you have lost the receipt as the same will be reflected on your bank statement.
Income from Business Or Profession
Proper recording of cash expenses
Many businesses in the country are labor intensive and wages of unorganized labor are generally paid in cash. Factory floor & other indirect wages account for at least 40% of your manufacturing expenses and improper recording of such payments result in higher profits as a consequence of under-recording of expenses, thus resulting in the higher amount of taxes. For example, in a factory around 50k a month paid as loading and unloading charges remain unrecorded due to non-maintenance of the proper register. This results in under recording of expenses by 600000 leading to extra payment of taxes by RS 180000(assuming a tax rate of flat 30%). Proper cash receipts with signature/thumb impressions of laborers should be maintained with wages register so that proper deduction of the same can be claimed.
Stock Valuation
Stock is normally valued at cost, but stock which has short shelf life should be valued on the principle of Cost or NRV whichever is lower. Net Realizable Value provides the actual realizable value of stock and hence, prevents the stock from getting overvalued, which ultimately reduces taxes. However, the practice of such valuation should be consistent throughout the years to avoid the unwanted attention of the income tax officials.

Depreciation
Income tax act provides multiple benefits to manufacturing enterprises, for example, additional depreciation, specified business under section 35AD, etc. In the case of a manufacturing enterprise, if a new machinery is installed during the year, then in addition to the normal depreciation, such units are also eligible to claim additional depreciation up to 20% in the year when the machinery is put to use. Similarly, a separate section, section 35AD was introduced providing a total deduction of capital expenditure carried out by enterprises if they are engaged in businesses specified in this section. The idea behind providing benefits under section 35AD was to encourage private sector investment in public infrastructure such as hospitals, cold storage, highways etc. An example of additional depreciation with figures can be helpful. Say, you have bought a new machinery and claimed normal depreciation @ 15%, and forgot to claim additional depreciation @ 20%, then you have paid extra taxes on that 20% lesser depreciation claimed as well as lost the chance to claim the expense since the deduction of additional depreciation is available only in the first year.
Always deduct tax at source
There are several transactions specified under Income Tax Act which requires the service receiver or the buyer to deduct tax at source while making payment to the service provider or the seller. If a person fails to do so, then such an expense becomes inadmissible and ultimately increases the tax burden. Say that in a year you paid Rs 2,00,000/- as commission to your business agent and didn’t deduct tax @ 10% on the same. In such cases, the whole expense of Rs 2,00,000/- shall be disallowed while calculating taxable profits.
Cash payments
Avoid making cash payments above Rs 20,000/- in a day to a single person. Income tax act disallows the deduction of expenses if paid in a day to a person exceeding Rs 20,000/- other than by way of cheque or draft. For example, you are carrying out repairs at your factory and paid an amount of more than Rs 20,000/- to a single person on a single day by cash, then income tax act officers are empowered to disallow such expenditure while assessing total income. However, rule 6DD of Income Tax Rules provide some exceptions and cases where the section shall not be applicable.
Deduct incomes which are taxable in other heads
Indirect incomes such as interest incomes are added while calculating total profits. Most people aren’t aware that such incomes are taxable under other heads and may even be exempt in some sections. If not deducted from book profits, one may not even end up paying higher taxes but even fail to avail tax benefits available. For example, interest income on a savings account is taxed under the head ‘Income from Other Sources’.
Also, section 80TTA of Income Tax Act allows deduction of interest on savings income up to Rs 10,000/- per year. If such an income is not deducted from book profits then it will be taxed as any other income and also deduction under section 80TTA will be missed out.

File your income tax return on time
Income tax department suggests to file income tax return on time to avail many benefits. One of the main benefits is carry forward of losses on business income. Business income losses can be carried forward for a consecutive period of 8 years and hence can be set off against income of next years if the same is not set off against the incomes in the current year. However, the benefits of carrying forward of losses are available only when the income tax return in filed on or before the due date. Therefore, one must keep in mind the dates for prompt and timely filing of income tax returns.
The concept of Long Term & Short Term Capital Gains
People always seem left out when they are asked about capital gains. Also much aren’t aware of the concepts of short-term and long-term capital gains. Any capital asset held for more than 36 months is categorized as long term capital asset and on the sale of such asset long term capital gain arises. Anything sold within 36 months is categorized as short-term and is taxed at a flat rate of 15%, however, different options are available in case of long-term capital gains. But in the case of equity shares or debentures of a listed company, units of UTI, Zero Coupon Bonds, and equity oriented Mutual Funds, instead of 36 months holding period is 12 months.
Claim indexation
Indexation is very simple concept based on time value of money, i.e., what is the current value of Rs 100/- is today will not be same 5 years down the line. Say you have a land purchased in the year 2000 for Rs 5,00,000/- and now in 2016 you want to sell it for Rs 30,00,000/-. Now, it’s a long-term capital gain and you must be thinking that you will be taxed at Rs 25,00,000/-, then that’s not the case. Each year a Cost Inflation Index (CII) is announced by Finance Ministry which is used to calculate the indexed cost. CII of the year of sale will be multiplied by original cost and divided by CII of the year of purchase to arrive at the indexed cost of acquisition. In this case, CII of the year 2000 is 389 and CII of 2016 is 1081 and the indexed cost of acquisition shall be Rs 13,89,460 (5,00,000 x 1081 / 389) resulting in a long-term capital gain of Rs 16,10,540/- (30,00,000 – 13,89,460).
Treatment of Mutual Fund SIP
Mutual Fund sale representatives will never make you aware about the proper tax treatment of your mutual fund SIPs and will keep on saying that if units if sold after 12 months then capital gains shall be exempt.
The statement is only half true and the fact is when you start a SIP, each installment is considered as a separate investment. So after 12 months the first installment you have paid has only exceeded a period of 12 months and other 11 are still short-term in nature, and STT paid capital gain is exempt only if it is long-term. For example, started investing Rs 5000/- a month with effect from 1st Jan 2015 and by 31st Dec you have invested Rs 60,000/-. Now on 1st of Jan 2016, the only amount invested in Jan 2015 is long term and rest 11 instalments are short-term and hence will attract short-term capital gain at a flat rate of 15%. Hence, always sell your mutual fund units in installments on FIFO basis to avoid unnecessary tax on short-term capital gains.
Exemption from capital gains
Sections 53 to 54H have been introduced by Finance Ministry over the years to provide exemption on capital gains if sale proceeds realized are invested into assets specified in the respective sections. For example, Section 53 of Income Tax Act exempts capital gain arising out of the sale of the residential house if sale proceeds realized from the sale are reinvested in either purchase or construction of another residential house. Section 54EC provides for exemption of capital gains arising from the sale of capital assets if such sale proceeds are invested in bonds of government companies notified by the government from time to time.
Life Insurance Premium:
Life Insurance policy provides a security to your family and also provides returns on your investments. One more thing is that premium paid on life insurance of self, spouse and children whether dependent or not, married or not can be claimed under section 80C along with other deductions subject to a maximum cap of Rs 1,50,000/-.
Investment in PPF:
Public Provident Fund is a very old & successful deposit scheme offered by the government of India as it provides a lucrative rate of interest very much similar to the rate of interest on Fixed Deposits offered by scheduled banks. The scheme of PPF in lucrative not only in terms of interest but, it also allows to claim deduction up to Rs 1,50,000/- along with other deductions under section 80C. Interest on fixed deposits with banks are subject to tax, but interest on PPF is even exempt from tax under section 10. So, if we compare fixed deposits with PPF then PPF is beneficial in two ways, the first contribution to PPF can be claimed as a deduction under section 80C and interest on PPF unlike interest on FD is exempt under section 10 from tax.
Medical Insurance Premium:
Medical Insurance policies are provided by many leading insurance companies premium paid on medical insurance premium of self, spouse and dependent children and parents can be claimed under section 80D subject to a maximum cap of Rs 25,000/-.
Hire services of an expert:
Many people end up paying a higher amount of taxes because of improper or no tax planning. Many of us instead of hiring services of an expert, prepare books of accounts near the deadline hastily and realize that much of tax could have been saved if, right advice was available at the right time. In India, Chartered Accountants are considered as the best tax planners and as an expert in the field, they ensure that maximum tax can be saved within the bounds of law and simultaneously availing maximum benefits of tax saving schemes.
Pay advance taxes:
Looking at the inflows, if you believe that you will be liable to pay self-assessment tax even after claiming a credit of TDS, then you should deposit advance taxes to the credit of Central government according to percentages as prescribed at regular intervals. Non-deposit of service tax will result in interest under sections 234A, 234B & 234C, and these interests are to be deposited mandatorily, as the department doesn’t show any leniency in regard to these interests.
Remain aware of recent developments:
You must be thinking that I am suggesting to hire an expert on the one side and advising to remain updated on the other side. No one is asking you to follow each and every detail but you must be aware of basic information such as concepts of tax slabs, rates of income taxes, implications of any new tax law to be introduced, etc.

Interest, Fees & Penalty:
Ensure that your tax manager is prompt and up to date on due dates of filing of returns and payment of taxes. Income tax department levies strict and heavy fees & penalty on non-filing, late filing, non-payment or late payment of returns and taxes respectively. Say, you have deducted TDS on some payments in the month of July, then you should have deposited such payment to the credit of government by 7th August, and assuming your business is a partnership firm, the return must have been filed on or before 15th November. In this case, if you fail to deposit tax before 7th August than interest shall be charged at the rate of 1.5% of the TDS amount per month. Also, if you fail to file a return on 15th November and, filed the same on 19th November, then you shall be charged Rs 800/- (Rs 200/- per day x 4 days) as fees under section 234A.

Anoop
Dilzer Consultants Pvt Ltd

https://www.quora.com/What-are-the-tax-saving-options-for-start-ups-in-India
https://www.entrepreneur.com/article/318454
https://cleartax.in/s/benefits-startup-india-program

17 April 2019