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10 Best Income Tax Saving Tips for an Entrepreneur

Updated on: 23 May, 2024 05:20 PM

Running a business is not an easy charge. For long-term sustainability, entrepreneurs try to control and manage their expenses. An entrepreneur who incurs certain costs while setting up the business finds it very disappointing to pay money on income tax. And why not? Profit serves as a ladder to the growth of a business, and paying taxes here seems stressful.
But a business person can utilize specific tax planning methods during the financial year to save a portion of the tax payable. Tax2win guides you here by making the tax calculation simple. Our experts help you save the maximum by suggesting tips on reducing taxable income.

Few tips for an Entrepreneur's tax saving:-

Proper management of cash expenses
Being in business, you cannot avoid expenses in cash. All you have to do is have a proper record of that, i.e., prepare cash payment vouchers and take a sign/thumb impression of the receiver on that. As per the new rule, any cash payment made to a person exceeding Rs. 10,000 per day would not be allowed as an expense in your books of accounts by the Income Tax Department.
Having a proper record of transactions also helps you in the long term as it helps you make more aware of where you are spending more and which areas you need to focus on to take care of operational metrics.

TDS deduction is necessary if required as per Income Tax Act
If it is essential to deduct the TDS basis on the amount, limit, and transaction nature as per Income Tax Act. If TDS is not deducted, that expense will not be considered while calculating the profit and thus increases the tax burden.

Donation
Entrepreneurs can save big on taxes by performing good deeds. The condition is that the donation should be made to the PM's relief fund, political parties, or registered charities under section 80G of the Income Tax Act to get tax relief for the donations made. Do remember to retain your donation receipt. (Donations in kind are not considered)

Business Utilities
The expenses on phones, vehicles, parking charges, and so on are claimable if made purely for business purposes. Let us talk about these business utilities:-

  • Preliminary expenses:- Before, the set-up of the business, and all the expenses made are eligible for deductions under Section 35D of the Income Tax Act. These expenses can be deducted from the taxable income in five equal installments.
  • Regular expenses:- If the company is being operated from home, then the expenses on electricity can be deducted proportionately on the basis of utilization. In addition, further expenses like internet connection and rent are also deductible under this situation.
  • Conveyance expenses:-If the vehicles are used extensively in the business, then fuel and repair & maintenance expenses are subject to be deductible as expenses in the company’s book of accounts.

Medical Insurance
Medical insurance premiums paid up to Rs. 25,000 can be claimed under Section 80D of the Income Tax Act, 1961, from the gross total income. Under this section, the premium paid for spouses, children, and parents is also covered.

Housing Loan
Taking a home loan comes with tax benefits. Interest paid on such home loans is deducted under Sec. 24 of the Income Tax Act. Further the principal repayment of a loan up to Rs. 1.50 lakhs can be deducted Under section 80C of the Income Tax Act. Additionally, you can also claim the benefit of an interest deduction of Rs. 1,50,000 under Sec. 80EEA of the Income Tax Act subject to specified conditions

Depreciation
Companies in the manufacturing sector are given additional tax benefits. For example, companies installing new machinery over a year can claim up to 20% further depreciation in addition to the regular depreciation in the year they were used.

Traveling and Accommodation
Business persons usually travel places for business purposes. If the bookings and travel expenses are done at the company’s expense, these can be deducted from the company's taxable income. The travel expenses in cars, trains, etc., are covered, apart from driver’s charges and toll taxes. The expenses also include fees given to park the vehicles and accommodation costs for legitimate business travels.

Hire own family members and relatives
Hiring one’s own family member is beneficial as they can be paid salaries like other employees. The company can pay them just Rs. 2,50,000 a year if there is no other income source. 2,50,000 income per year is non-taxable. This salary can be set off against the company’s taxable income, thereby reducing the overall tax outgo of the company.

Spend the surplus on marketing
Digital marketing reaches vast customers rather than traditional methods. All the expenses involved in digital marketing are tax-deductible. Whatever surplus you are left with by the end of the year can be used in marketing and advertising your startup and save on tax. Also, this marketing is done via digital techniques as it reaches out to a new customer base faster.

Make the deduction of tax at the Source.
As per the Indian Income Tax Act, in specific transactions, the buyer or the service receiver must deduct tax at the source while paying the seller or service provider. If anyone fails to do so, the tax burden increases ultimately.
For example, If you pay Rs. 2,00,000/- as commission to your company agent and didn’t deduct 5% tax on the same. In such cases, 30% of the expense of Rs 2,00,000/- shall be disallowed while calculating taxable profits.


Frequently Asked Questions

Q- Do entrepreneurs pay personal income tax?

Yes, entrepreneurs have to pay income tax on the profits they earn from the business.


Q- How much should a business owner save for taxes?

A business owner should save an average of 15-20% of their profit for taxes.


Q- What is the tax rate for entrepreneurs?

The tax rate depends on the income of the entrepreneurs.


CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.