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Tips For Start-Up Taxation

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Publish Date: July 04th, 2019

By: Sandhya Kannan, Head – Content

Today is the age of the cyber generation—the millennials. This generation cherishes its freedom and leads life in the fast lane. Personally, and professionally, they are fiercely independent. They long to be masters of their own destiny. They strive to build flexible ventures with like-minded people while maximising profit. It is not uncommon for them to leave lucrative jobs to pursue their own ‘start-up’ dreams.

Income tax for start-ups

For any entrepreneur, the primary goal is to build a sustainable venture that keeps generating revenue. But youngsters often tend to ignore or not fully realise the importance of savings. While focusing on profit, they end up ignoring an important factor—tax planning.

In this age of cut-throat competition, cost rationalisation has great significance for any business. Without it, all attempts to maximise revenues and optimise profits come to no avail. Reducing tax liabilities is a common and simple way of cutting costs. Businesses need to be aware of how the system of income tax in India works. They can then figure out ways and means of minimising the tax paid, legally. There are different ways for start-ups and business owners to increase their earnings by reducing their tax liabilities.

Related:What is Angel Tax?

Understanding start-up expenses

Entrepreneurs incur a lot of expenses at the time of setting up their businesses. All expenses incurred for setting up a new business come under preliminary expenses. These include all expenses before the commencement of the business. Under Section 35D of the Income Tax Act, 1961, all such expenses are exempt from income tax. They have to be deducted in equal instalments over five years, and not all at once.

Rent paid for office premises

Start-ups and small businesses tend to avoid large investments in office property. They either follow the work-from-home model or operate from home offices or rented places. In such cases, the house rent paid can be treated as a business expense. In the case of owned property, the property tax paid can be deducted from the taxable income. Thus, there is a reduction in the taxable income of the business.

Hiring a family member

Paying salary to unemployed family members is a common way of reducing tax liability. If there are family members without any earning, you can show the salary paid to them. Any amount up to Rs 5 lakh per year is exempt from income tax. This will be treated as a business expense, thereby cutting down on the tax outgo.

Hotel and travel expenses

Business development is a significant and cost-intensive activity for any organisation. For start-ups, too, setting up networks and/or meeting investors call for a lot of travelling. Lengthy hotel stays and extensive travel involve a lot of costs. All these expenses can be treated as business expenses and written off, provided all supporting documents and bills are there. This can help start-up promoters save a lot of money.

Related:Filing Income Tax Returns - Common Mistakes

Medical insurance

Every individual is entitled to a tax exemption of up to Rs 25000 spent on medical insurance premium. This exemption is available under Section 80D of the Income Tax Act. It can be claimed over and above the deduction under Section 80C. The insurer, spouse, dependent children, and dependent parents are eligible for coverage by the policy. An entrepreneur can also claim this benefit, but for that to happen, they have to forgo any medical insurance provided by their employer.

Depreciation

Depreciation is a deduction allowed under the Income Tax Act. It calculates the decline in the value or worth of a taxpayer’s intangible or tangible assets. The Income Tax Department uses the depreciation amount to write off the cost of an asset during its useful life.

If all capital expenses, such as cars, buildings, and furniture, are made for the business, the entrepreneur can claim depreciation. The Income Tax Act has set the percentage and method of calculating the depreciation value. The total calculated amount is deducted from the taxable income of the business. Depreciation is an effective way of saving tax.

Related: Tax Planning Under MAT

Life insurance premium

A life insurance policy not only provides security for the family but also acts as an investment instrument. It is also useful as a tax-saving tool. The premium paid on life insurance for self, spouse, and children is exempt from tax. A deduction under Section 80C can be claimed. Do note that the total amount of deduction under this section currently stands at Rs 1.5 lakh.

Investment in Public Provident Fund

The Public Provident Fund (PPF) is a time-tested and useful deposit scheme launched by the government of India. It provides an attractive rate of interest, which matches the rate of interest on fixed deposits (FDs) offered by scheduled banks. While the interest received is lucrative, there is an added advantage of putting money in a PPF account. PPF account holders are eligible for a tax deduction amounting up to Rs 1.5 lakh. This is along with other tax deductions available under Section 80C. Interest on FDs with banks is subject to tax, but interest on PPF deposits is tax-free.

Related: What is Dividend Distribution Tax?

Charitable donations

Making donations to charitable organisations is a good strategy to save tax. These deductions fall under Section 80G of the Income Tax Act. Donations made to specified relief funds and charitable organisations can be deducted from the total income. Since the assessment year, 2018–19, a cash donation of only Rs 2000 is eligible for deduction. There is no upper limit for exemption of donation made by cheque or electronic transfers.

Education loan

If you have taken out an education loan and are in the process of repaying it, you may want to reconsider that amount as an expense. This also applies to the education loan you have obtained for your children. Educational expenses for up to two children can be claimed as deduction under Section 80C.

The importance of on-time tax filing

The Income Tax Department recommends the timely filing of returns. In fact, filing income tax returns on time is beneficial in many ways. One of the main benefits is that losses on business income can be carried forward for eight successive years. This leaves scope for adjusting the losses to the income of the following years if they cannot be adjusted in the current year. This benefit can only be enjoyed if the start-up’s income tax return is filed before the due date.

Related: Penalties Under the Income Tax Act

Summing it up

'Money saved is money earned,' says an old English proverb. In their quest for growth, new businesses might fail to identify opportunities for saving. But one can never over-emphasise the importance of cost rationalisation. Tax reduction is possibly the most pragmatic way to achieve this.

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