Tax Saving Investments for Businesses You Should Know

Introduction

For the financial year 2020-21, if you opted to file your returns using the old tax regime, you might have ended up paying more than you should. From 2020-21, an individual can choose to pay their taxes using the new tax system, which provides lower and concessional tax rates along with various deductions and exemptions.

As an entrepreneur, you might always be on the lookout for ways to save tax. One of the best tax saving options is via investments. Investments not only help to counter inflation but also help to diversify portfolio risk and provide steady returns. However, many people are hesitant to invest due to factors such as a high risk, uncertain returns, and taxation on profits.

While it is true that investments are subject to risks, it does not imply that one should not invest. Investments can go a long way in saving taxes and help in wealth creation. We will now take a look at some tax savings investments for entrepreneurs, to help them grow their wealth from businesses.

Different Ways an Entrepreneur Can Save Tax

Let us take a look at some of the ways a business can save tax.

1. Public Provident Fund (PPF)

A PPF is an investment scheme for those who want guaranteed returns and are not willing to undertake a high risk. Moreover, the returns earned from a PPF are tax-exempt, which can be availed in the form of deductions for the amount deposited under Section 80C. PPF is backed by the government and is available at all post offices and banks across the country. You can choose to invest in a PPF scheme for 15 years and further extend it by a block of 5 years. At present, the returns on PPF is 7.1 per cent per annum, which is subject to revision every three months.

2. Sukanya Samridhi Yojana

If you have a daughter under 10 years of age, you can open a Sukanya Samridhi Yojana account in her name. The Sukanya Samridhi Yojana is a tax saving scheme, wherein you can deposit an amount of just Rs. 1000 in your daughter’s name. This account will be functional till your daughter attains 21 years of age or till she gets married. The corpus fund that will be received upon maturity would be tax-free income.

3. Equity Linked Savings Scheme (ELSS)

Today, ELSS is one of the best tax saving options in India, as it provides high returns and has a low lock-in period. Typically, an ELSS can provide returns as high as 19.6 per cent, which is much higher than the returns on fixed deposits, PPF, or any other tax-saving scheme. In simple words, an ELSS is a diversified equity mutual fund, which invests your money in shares of companies across market capitalisation. This helps to diversify the risk and increase returns. However, keep in mind that you cannot withdraw all the funds from an ELSS before maturity.

4. Unit Linked Insurance Plan (ULIP)

An insurance policy is usually undertaken to prepare for unplanned emergencies, such as the death of a family member. With a ULIP, you can avail of a deduction of up to Rs. 1.5 lakh on the premium paid under Section 80C. Under ULIP, you get the double benefits of insurance and investment, as the premium paid goes towards the insurance policy and various mutual fund investments. Moreover, the amount received upon maturity of the policy is also tax-free.

5. Depreciation

If you are a manufacturing enterprise, the Income Tax Act provides multiple benefits for you. In case you have installed new machinery in a given financial year, along with additional depreciation, businesses can also claim up to 20 per cent more depreciation where the machine has not been put to use.

Tips to Saving More

Besides the investment schemes mentioned here, there are several other tax-saving tips that businesses can follow. Let us take a look at some of them.

1. Digitise Your Transactions

To save taxes and avoid coming under the radar of the income tax department, it is advised that you digitise your transactions. Digitising your transactions implies that you should pay your employees, vendors, and carry out all other payments online. If you make a single payment to an individual or an entity of more than Rs. 20,000 in cash, the transaction will be considered null by the income tax department.

2. More in Digital Marketing

To reach out to more people and expand your customer base, it is best to implement digital marketing practices. This will also benefit you from the viewpoint of saving taxes, as marketing expenses are subject to tax deductions.

3. Municipal Taxes by Cheques

Often, people pay municipal taxes in cash and forget to maintain receipts for the same. However, paying municipal taxes paid during a financial year can be used to claim a deduction from the income of house property. By paying taxes through cheque, you will at least have a record of the payments made through your bank statements, which will help you claim a tax deduction.

4. Always Deduct Tax at Source

While executing various transactions over the daily course of business, there are several payments for which a proprietor needs to deduct tax at the source. The buyer or receiver should calculate and pay the tax deducted at the source since not doing so increases the tax burden while filing tax returns at the end of the fiscal year.

5. Employ Your Family Members

Hiring your family members and relatives in your business is a great way to reduce the tax burden. Although they can be paid salaries like any other employee, if the family members have no other source of income, the company can then just pay Rs. 2.5 lakh a year. This way, the company will not be liable to pay any taxes on salaries paid to workers. As wages and salaries paid to employees is a cost to a firm, it can be offset against the company’s taxable income, which in turn, reduces the tax incurred by the company.

Also read:

1) Why Do We Pay Income Tax in India? Importance, Applicability & more
2) Provisions for Income Taxes in India Applicable for Salaried People.
3) How To Pay Income Tax Online? Step-By-Step Guide.
4) The USA vs India: Taxation System
5) OkCredit: Simple, Paperless & Secure solution for businesses

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FAQs

Q. What is the National Pension Scheme? Can I save taxes if I invest in NPS?

Ans. The National Pension Scheme (NPS) was launched by the Government of India to provide a steady and regular income to Indian citizens post-retirement. A minimum investment of Rs. 6000 is required to invest in the NPS. If you have invested in the NPS, you can avail of tax deductions under Section 80CCD of the Income Tax Act.

Q. Which is the safest tax-saving investment scheme?

Ans. At present, the Public Provident Fund (PPF) is the safest and most convenient tax-saving investment scheme in India. It not only provides steady returns, but you can earn up to Rs. 16.7 lakhs at an interest rate of 7.9 per cent upon maturity, with just Rs. 5000 per month in investment. The PPF scheme is available in post offices and banks across India.

Q. How can I save tax on my investments?

Ans. Multiple private and government-led schemes can help you save tax. As a business, there are certain sections in the Income Tax Act that provide tax exemptions upon investing in various financial instruments, including NPS, PPF, health insurance policies, and ELSS. These schemes will not only help to save tax but also help in wealth creation.

Q. How much tax can I expect to save if I invest in mutual funds, insurance policies, or provident funds?

Ans. If you choose to invest in schemes such as mutual funds, provident funds, or procure a health insurance policy, you can expect a tax deduction of up to Rs. 1.5 lakh under Section 80C under the Income Tax Act. An investment of up to Rs. 1.5 lakh can help you save anything between Rs. 7500, for those in the 5 per cent tax slab, and Rs. 45,000, for those in the 30 per cent tax slab.