A small business, just like a big business, incurs many expenses. The major expenses of small businesses could vary from stocking inventory and repairing machinery to managing payroll for their daily working capital needs. But one of the biggest expenses for any small business owner in India is taxes. Even after implementing the Goods and Services Tax (GST), there are various layers of taxes attached, along with additional fees. Thus, tax planning is an important aspect of financial planning for small businesses.
So, here are a few income tax saving tips for small businesses in India to save a sizeable amount while paying taxes:
- Record all expenses related to the business
It is important for every small business to record all expenses, from large to small ones. This will help you become more aware of where your money is going and what areas of your business you need to focus on improving. This will ensure that no expense, however small, goes unaccounted for. Also, maintaining such a record will also come in handy when filing income tax, and you will not end up paying more taxes on your profits.
- Availing a business loan
Small business loans are helpful for planning your capital expenditure or expanding your business. Moreover, as per the Income Tax Act, 1961, you can also claim a deduction on business loan interest. To avail a loan, simply assess various small business finance options, select the right lender, fulfil the eligibility criteria, and submit the relevant documents.
- Use digital payments
Though paying in cash may feel more convenient, small businesses must be cautious while conducting such transactions. For example, if you pay more than Rs 20,000 in cash in a single day to a worker, the income tax department may deem the transaction null. This, in turn, increases the business’s tax liability. Therefore, it is always advisable to pay workers through bank transfers. By doing so, small businesses can avoid higher taxes and ensure that their employees get fair compensation.
- Depreciation costs
The Income Tax Act, 1961, allows businesses to claim an additional deduction of 20% on the cost of new machinery installed during the year. You can check more such provisions available to businesses in specific industries under section 35AD of the Act. It is important to note that this deduction is only available in the first year of the new machine’s operation.
For example, suppose you install new sewing machines for your garment business. You can claim an additional 20% for depreciation in the year when the equipment is installed or put to use from the regular depreciation of 15%. So, file your taxes correctly to get sizeable savings.
- Avoid penalty for late filing
There are certain deadlines to meet when it comes to tax filing. As a responsible business owner, always submit your tax returns before the due date to avoid paying the penalty. Moreover, filing for returns at the last minute can be stressful and affect the cash flow.
Taxes can affect small businesses significantly, hence it is important to find ways to lower your tax burden. With these income tax savings tips, you can make the most of tax deductions and contribute to your business growth.
