Tax Planning

Tax Planning:  Our recommended Tax Planning Strategies for new businesses 

Choosing the right business structure 

The right business structure based on your business setup (startup, partnership, solo entrepreneur)  will form the base of your business structure. This will also determine your tax planning and how to minimize tax payment and improve profitability.

Startup expenditure

The startup expenditure can be deducted in the first 5 years as per Section 35D of the Income Tax Act, 1961. Section 35D specifies that the  the maximum deductible cannot be more than 5% of the total project cost or the total capital invested in the business.

Investment Planning

Do not wait for the end of the assessment year to seep in for you to start thinking about tax-saving investments such as ELSS, PPF, tax-saver FDs, etc. Rather, check, research, plan, and stagger your investments regularly throughout the relevant financial year. This way, when you file your ITR, you will be eligible for a wide range of tax deductions and exemptions.

Claiming all possible deductions 

If you are a startup and just starting as an entrepreneur, you should see to it that all your books tally and you take advantage of all deductions possible. For example, apart from claiming the deduction of the preliminary expense in accordance with section 35D of the Income Tax Act, you can also get several deductions and exemptions as outlined in Chapter VI of the Income Tax Act, based on your investments and expenses. 

If you are tax planning for business in India and you declare your home to be your office, you are eligible to claim a Home Office Deduction by subtracting the relevant expenses like depreciation, electricity bills, property bills, business expenses, etc., but if you sell off the property, you might have to let go of long term capital gains tax under section 54 or 54F. 

Similarly, you can claim deductions like business expenses, which are incurred while running your business, and charitable donations, which attract deductions under section 80G of the Income Tax Act. 

Paying municipal taxes by cheque 

Payment of municipal taxes on your office premises by cash can  result in the loss of receipts. On the other hand, paying municipal taxes by cheque allows you to claim a deduction. Pro tip – if you have still paid by cash and lost the receipt, print the consolidated bank statement and show that there has been a payment of municipal tax. 

Diligently record cash expenses 

Although startups are flourishing in India, many of them are working in the unorganised sector where the labourers get paid in cash. Such indirect wages account for at least 40% of your functional expenses. For example, proper tax planning for business can never be implemented if in a company at least INR 50K is paid, which is not recorded or improperly recorded due to the absence of a proper register.

This results in the under-recording of expenses in a financial year by INR 180K – amounting to a flat tax rate of 30%. Keeping proper cash receipts along with signatures and thumb impressions of labourers is essential for claiming proper deductions from wages and ensures tax planning for companies in India. 

Conclusion

In addition to the above, there are some other strategies as well. These consist of deducting tax at source. Then one can avail of a deduction for depreciation as well. Under the Income Tax Act of 35AD, if a piece of new machinery is installed in a manufacturing company, there is a provision for additional tax exemptions.

In the case where new machinery is installed in a manufacturing enterprise, in addition to the depreciation, an additional tax deduction of 20% is eligible for the machinery unit if it is put to use in the same year. 

Furthermore, deducting income that is taxable under other heads or “income from other sources such as indirect income” is another strategy that new businesses can tap into. They can also claim indexation and report foreign assets, if any, – these are some of the strategies that would help in appropriate tax planning for companies in India.

Hiring the services of an expert, paying taxes in advance, investing in PPF, and various forms of insurance premiums also help in tax deductions for companies in India. 

FAQs

What are the strategies for tax deduction?

Some of the strategies for tax deductions are:
> Utilising depreciation
> Accounting method planning
> Pass through entity taxes
> Utilising charitable considerations
> Reporting foreign assets, if any. 

How hiring a professional will help me in strategising for taxes in India?

The Indian tax laws can sometimes be quite difficult to understand. There are various sections and subsections and subsections of those. If you are a novice, calculating the tax payable in India could be a hassle. That is why it is always advised to take the help of an expert or a professional. 

There are multiple tricks and inroads for getting tax exemptions and deductions. There are also numerous penalties, fines, or interest for not filing or late filing of taxes. Thus, you should always get the help of an expert while filing taxes.

What is tax planning for a new business?

Tax planning for new businesses refers to a systematic financial procedure surrounding the tax provisions of the country. The primary goal of the business should be to implement it in such a way that maximum tax liability can be reduced or entirely eliminated.  According to this procedure, an entrepreneur will have to look at the multiple taxation options to properly determine when and in which way the business should be conducted in order to refrain from penalties, etc.

What does tax planning in India explain?

Before going into the depths of the tax planning of companies in India, you should know the 5Ds, or the 5 pillars of income tax planning. They are – deducting, deferring, disguising, dividing, and dodging to save tax. 

Now that you know that tax is a liability that should be minimised, you should understand that tax planning is the analysis of a person’s financial situation from a tax efficiency point of view so that they can plan and implement their finances in the most optimised manner.