For a businessman, Tax Planning is a very important element. Being self-employed, their income is treated as income from business/profession and they have a higher probability of reaching in highest tax slab sooner. However, there are many deductions available to a them which helps in reducing the income almost by 10-15% as compared to a salaried individual with same income level.
Here is a list of the benefits which a small businessman can avail to reduce the tax outgo:
1. Normal Deductions: Deduction up to Rs 1 lakh under Sec 80C is available to a self -employed personal. Here, one can invest in PPF, ELSS, NSC, FDs and incur expenses for life insurance premium to avail the benefit. Children school fees and housing loan principal repayment is also included in this section. Now a contribution of 10% of Gross total income in New Pension Scheme is also available for tax deduction under section 80CCD. However, this is clubbed with section 80C and maximum limit for tax benefit is capped at Rs 1 lakh. One can also take a health insurance for family or parents and avail tax deduction under Sec 80D. For self and family (children & spouse) the limit for annual premium is Rs 15000 while for parents additional limit of Rs 15000 ( Rs 20000 if senior citizens) is available.
2. House Rent: Many small business owners stay in rented house during the initial phase of their venture. For them, under section 80GG, a deduction of Rs 24000 annually is available for the rent they are paying, provided certain conditions are met.
3. Housing Loan: By taking a housing loan a deduction of Rs 1.5 lakh annually on the interest repayment can be claimed from the personal income Under Section 24B. If it’s a second house then there is no maximum limit and one can claim the deduction of entire interest annually from their income.
4. Education Loan: Under Section 80E, if you avail a loan for self or children’s education, you can claim the deduction of entire interest from your income as an when the repayment starts. This is one of the good benefit available which meets the children’s education requirement and simultaneously helps in reducing taxability.
5. Claim Business Expenses: There are host of expenses which a self- employed can claim from his/her business to reduce the total tax outgo thus giving more in the hand. The primary deduction is the expenses in relation to the business/work which can be claimed as business expense. Office expense such as rent, telephone or internet etc, cost of travelling for business meetings, and many other such expenses are deductible from the business income. However, within these if there is any personal expenses it cannot be claimed. Apart from this one can also claim depreciation on assets like computers, furniture’s, vehicles like cars etc. However, one should note that for claiming all these benefits, the expenses should not be fictitious and required bills should be maintained.
6. Create HUF: This is one of the best tax saving avenue which is utilized even by salaried. By forming HUF a separate entity can be created so that the entire income gets distributed between your business and this newly created entity. This helps in reducing the tax outgo from the total income. Although, HUF comes into formation as one gets married, the birth of a child completes the process for claiming the benefit legally. However, one need to be careful and do not utilize this for tax avoidance. A help of a good CA is required to meet the objective.
7. Include Family Members: Many small businesses are run by family members. Sometimes in joint families, even the relatives support in different capacities according to their skills which are required for growth of business. If you are utilizing the expertise of family members in your business and wish to engage them legally, then making them employees can help in reducing taxability. Since, any remuneration/compensation paid to employees is deductible from the business income, it shifts the part of business income to the concerned person.
There are other benefits like carry forward of losses for eight years and adjustment of capital gains towards losses which a businessman can utilize. Even treatment of dependents (including parents) on specific illnesses or disability can be claimed up to a certain limit. The purpose of all these benefits is making your income tax efficient so that you can enjoy your dream run. However, it is also important to take notice of the income tax rules to avoid any dissatisfaction later. Plan your finances so that you do not strain them later.
As Published in Business Bhaskar
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