Taxes can be a turndown for the start-ups, isn’t it? If you have set up an Indian start-up, you already struggled a lot on the personal and professional front. Government recognized startups are exempted from paying taxes for the first three years, but your startup company might not be on that list yet, isn’t it? And this is making you worried about paying hefty taxes to the government. So, if you want to save taxes, you have to opt for proper tax planning avenues.
It is important that you plan for your taxes from the beginning of a financial year so that you can efficiently handle it when the due date is near. Here are some tips for the startup entrepreneurs who are worried about their tax planning.
Employ your family members
One of the wittiest things that an entrepreneur of a start-up firm in India can do is to hire family members and make them salaried employees. Then the salary is deducted as an expense from the revenue of the enterprise, but the salary comes back to the home only. This way, the tax burden is reduced, and the money is not going outside the family of the entrepreneur.
Use your business expenses to reduce tax burden
- Preliminary Expenses: The costs incurred before the commencement of the business unit is deductible u/s 35D of IT Act. It is recorded as the preliminary expenses and can be deducted from the taxable income over 5 years, equally.
- Convenience Expenses: If the entrepreneurs use phone or vehicle for the benefit of the business, expenditure on these can be deducted as business expenses. From the phone bills to the driver’s charges or even the parking fees can be accounted under the loss
- Regular Expenses: If someone is working from home for his or her start-up, the electricity consumed for work purpose can be shown under the expense head. This is helpful for the start-ups to cut their tax burden. Wi-Fi or internet charges, rent costs are also deducted for calculating taxable income.
- Depreciation Expenses: Depreciation on all capital expenses can be deducted as an expense from the income of the firm. If you make all the capital expenditure in the company’s name, you can claim depreciation on them as well which will reduce your tax burden
- In the recent budget of 2017, condition to carry forward losses has been relaxed. To carry forward and set off losses against profits after seven years can be done without having 51% shareholding in the company. The founder members only need to hold the shares.
- Minimum Alternate Taxes: The startup companies can pay MAT after 15 years of incorporation rather than ten years, as per this exercise’s budget.
Use your housing loan interest to claim benefits
If you think that availing bank finance for building or purchasing a home will be problematic, you are on the wrong track because if you have your pan card is linked to your business; then you can avail deduction on the interest you pay every month on your house loan. Under section 80C of the IT Act, you can claim deduction up to INR 150000 per year, and you can include the interest of housing loan under this part of deductions.
Valuation of stock
You value your stocks at cost, but the stocks which have the shelf life limited or short should always be appreciated by NRV or cost, which is lower. If you are valuing the stocks at NRV that is the net realizable value, then you can reduce your taxes as NRV won’t overvalue your assets and will only record the amount you can reap if you sell them on the market. But you should keep in your mind, that if you are valuing as per NRV, you should do it from the beginning of the year and keep the same valuation method intact otherwise if tax officials have brains too.
Under the Income Tax Act of our country, there are several sections where it is mentioned which all transactions you have to tax at source. It means if you are paying salary, commission or any other payments, there are various operations specified under the act which all have to tax at source and if you are failing to do, those transactions will be inadmissible. You have to pay more tax as the tax burden will increase due to the same.
Don’t make cash transactions
Income tax department won’t allow any cash transaction in your books account for payment of tax if the maximum daily limit of INR 20000 exceeds. For example, if you are paying your workers more than INR 20000 as wages on a single day in cash then the transaction would be nullified by the IT department. This will increase your tax burden and not only that you will be paying excess amount than the standard you would have paid otherwise. Thus, it is always better to make bank transaction while paying any price above INR 20000 in a single day.
Claim indexation is the process of valuing money against money or finding out the time value of money in everyday language. Your purchasing power decreases with increasing inflation in the market and India; the inflation figure is always positive. So keeping that in mind, every year the government and Ministry of Finance announced the Cost Inflation Index or CII which can be used for finding out the indexed cost of any asset which was purchased earlier.
For example, if you have a land bought 2 years at INR 500000, and you are about to sell the same this year at INR 1500000 and show a profit under long-term gains as INR 1000000, then it would be a loss on your end, because the value of land at present time has increased according to 2 years inflation rate. Thus if you want to enter the right profit in your books and don’t want to increase your tax payments unnecessarily then you need to indexed the INR 500000 to current years rate and then deduct the same from selling price of INR 1500000 to find out the right profit amount.
Rightly treat your mutual funds
The investments in Mutual funds SIPs you make every month are separately regarded as individual investments. Thus if you are selling your mutual fund after 12 months, only the first installment or the installments which were made before 12 months will be treated as long-term capital gains and not the ones which are still in the bracket of 11 months. Thus you don’t need to pay long-term capital gain tax on the same.
Reduction in corporate tax rate
The budget for FY 2017 has also brought down the corporate tax rate to 25% from the existing rate of 30% for companies having annual turnover up to 50 crores.
There are many other avenues to save your taxes and government allows you to do so without evading taxes. You must take the benefit of these deductions and make proper tax planning according to the nature of your startup business.