Tax saving tips for small business

tax saving tips for self employed

If you are doing business you have income from almost every head of income except income from salaries & if you are not aware of tax saving options you might end up paying a large amount of taxes to the government every year. By using proper tax planning techniques a person can save taxes.

Tax planning means reducing tax liability by taking advantage of the legitimate concessions and exemptions provided under the tax law. It involves the process of arranging business operations in such a way that it reduces the tax liability of a person.

Just a small incidence to quote here, by paying advance taxes on time one can avoid the burden of interest & by filing the return on the time we can avoid hefty penalties. 

Here are a few tips for businesses to save taxes in the year 2020.

Payment of premium for insurance of stock in trade- 

Insurance of stock is important for those businesses for whom stock is of high value or the risk related to stock is very high. This can also be claimed as an income tax deduction.

The health insurance premium paid for employees- 

Employees are the most important asset of any business. Many employers take health insurance policies for their employees. Which is allowed as an income tax deduction to the employer if the premium is paid in any mode other than cash.

Bonus or commission to employees- It is allowed as deduction subject to section 43B(Expense allowed on payment basis). There is no restriction on the amount of bonus and it may exceed the bonus payable under payment of bonus Act, 1965.

Interest on loan- Allowability of interest of loan is as under.

Employer’s contribution to a recognized provident fund or superannuation fund or gratuity fund- These contributions are allowed as a deduction on payment basis.

Employer’s contribution to an unrecognized provident fund or unapproved superannuation fund or unapproved gratuity fund- Employer’s contribution to these funds is disallowed.

Employer contribution towards pension fund- This amount is available as a deduction to the extent of 

  • 10% of the salary of the employee or 
  • Actual contribution,

 whichever is lower. 

Here salary means basic pay and dearness allowance.

Bad debts written off-  This amount can be claimed if the bad debt is related to business and they have been taken into account while computing income.

Provision for Bad Debts- Provision for bad debts is always disallowed except for the banks & NBFC.

Securities transaction tax(STT)/commodities transaction tax (CTT)- It is allowed as deduction if assessee held shares/units/commodities as stock in trade.

Disallowance of payment made to a non-resident without deducting TDS- Any amount (except salary) paid to a non-resident or a foreign co. is not allowed in full (i.e 100% of that amount) if TDS on that amount is not deducted or TDS is deducted but not paid.

Example: Mr. ram resident of India paid interest of Rs. 5,00,000 to Mr. Richard a non-resident without deducting TDS on such amount. Now the whole amount i.e Rs. 5,00,000 paid to Mr. Richard is not allowed as a deduction from total income.

Taxpayers should deduct and deposit TDS in a timely manner so as to avoid this type of disallowance.

Note: Amount not allowed as a deduction is allowed in computing the income of the previous year in which such tax has been paid.

Disallowance of payment of salary payable outside India or to a non-resident without deducting TDS- Salary payable outside India to a resident or non-resident or to a non-resident in India if TDS is not deducted on such amount or  TDS deducted but not paid within the time prescribed under income tax Act then the whole amount of salary paid is not allowed as deduction.

Note: If TDS is deposited late even by one day salary paid outside India or to a non-resident in India shall not be allowed as a deduction.

Disallowances of payment made to a resident without deducting TDS- Any amount paid to a resident is not allowed to the extent of 30% if TDS on such sum is not deducted or TDS is deducted but not paid.

Taxpayers should deduct and deposit TDS in a timely manner so as to avoid this type of disallowance.

Note: 30% of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

Tax on non-monetary perquisite: If the employer pays tax on any non-monetary perquisite of employee then that tax is not allowed as a deduction 

Payment to specified persons: If payment to a specified person is in excess or of an unreasonable amount with regard to the fair market value of such goods or services then the Income-tax officer can disallow such excessive or unreasonable amount. 

Office Rent : If you have taken your office premises on rent then payment of rent expenses can be claimed as a deduction. If rent payment comes under TDS ambit then make sure you have deducted TDS appropriately to claim the deduction of same. Moreover, if you incur any further expenses related to renovation or repair then you can claim a deduction of the same provided it should be in revenue nature. If repair is in capital nature, then it needs to be capitalised and depreciation can be claimed on the same.

Hotel/Travel Expense :  If you are travelling somewhere within or outside India for business purposes like to meet with your client, then you can claim the deduction of hotel,travelling expenses and other expenses related to business trip.

Other office expenses : Any other expenses related to business are allowable expenditures. Any payment made to any expert or professional for compliances & litigations then same is allowed expenses. 

Example :- Tax audit fees, Special Audit fees etc. 

Cash payment: If assessee makes payment for any expenditure to any person otherwise than by an account payee cheque or demand draft or use of ECS through a bank account is more than Rs. 10000 in a single day then such whole expenditure shall be disallowed.

If payment made to a transporter then limit is Rs. 35000.

Exception of this rule are: 

  • Where payment is made to RBI, LIC, Banks, Government.
  • Payment made by the adjustment in book entries.
  • Where the payment is made by
  • Any letter of credit
  • By Telegraphic Transfer
  • Bill of exchange
  • Use of ECS
  • Credit/Debit card
  • Payment made where banking facility is not available 
  • Payment to producers of agriculture product, forest product, poultry product, livestock, etc.
  • Payment required to be made on a day when banks are closed
  • Where the payment is made for the purchase of products manufactured without the aid of power in a cottage industry, to the producer of such product
  • Where any payment is made to an employee or heir of such employee in connection with the retirement, retrenchment, resignation or death of such employee, on account of gratuity, provided such payment is up to Rs. 50000.
  • Payment made to an employee of his salary when such an employee is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty and he does not maintain any account in any bank at such place.
  • Payment made by an authorised dealer or money changer against the purchase of foreign currency or traveler’s cheque in the normal course of his business.
  • Payment made by any person to his agent who is required to make payments in cash for goods or services on behalf of such person.
  • Where the payment is made in a village or town which on the date of such payment is not served by any bank.

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