Setting up your own company or business involves a lot of effort, and in order to make it an independent legal entity you will have to abide by certain regulations and norms. Paying tax basis your income and transactions is one of the key steps to cement your company’s status as a legal unit. However, as an owner of a business or as a professional, merely stating your income from business for income tax purposes is not enough. You have to take into consideration other expenses and financial decisions to arrive at your taxable income.
What is taxable income in India?
Taxable income or the income basis which your tax liability is calculated is the amount you are left with after TDS is subtracted from your net income. This taxable income is calculated on a monthly basis is added for all 12 months of the financial year to arrive at your net yearly taxable income. However, you can reduce your taxable income so as to pay lower tax by virtue of investments and expenditures.
To make things extremely clear, these investments and expenditures are listed under various sections of the Indian Income Tax Act. So, based on your taxable income and corresponding tax slab, you can reduce your income tax liability by making the most of these deductions.
Is taxable income for a business or profession the same?
According to the regulations, any sole proprietorship, Limited Liability Partnership, private or public company, or a joint venture company is regarded as a business in India. In case of a business, you need to maintain a book of accounts mentioning your income, expenses, assets, and liabilities related to your business. You can avoid this only if your income is less than Rs.1,20,000 or if your total sales turnover is less than Rs.10,00,000 in any of the 3 three immediately preceding previous financial years.
Apart from this, individuals who earn an income basis the professional services they extend to an organisation or company are known as professionals. When it comes to matters of income tax, individuals practicing a defined profession be it engineering, law, architecture, accountancy, medicine, or interior decorating are termed as professionals. However, you can be a professional even if your services go beyond the extent of this list. Also, a professional can earn a regular monthly income outside of a payroll of a company and can offer services to earn a freelance income as well.
So, if you earn an income from your business or profession then you will be liable to pay income tax in a different way as compared to salaried professionals. Just like a business owner, you will also need to maintain books of accounts with profit and loss details along with your expenses. You can avoid this only if your income from profession, as specified by the Income Tax Department of India, falls within the specified maximum cap for your profession.
What is the taxable income for professionals in India?
In order to arrive at your taxable income as a professional, it is important for you to have your income listed under heads like ‘profits’ and ‘gross income from your business or profession’. After evaluating these with respect to your expenses (with actual receipts of the same), you can arrive at your taxable income. While working on an income tax calculation, do remember to include the income you may have drawn as a salary from other sources in exchange of your services, or as rent from any of your assets. Also, when calculating expenditure include every detail, even if it is a minor expense such as travel or food.
What is the taxable income for businesses in India?
If your business has a low turnover, just like a professional you can also maintain a book of accounts to determine your taxable income. However, in case your gross income is more than Rs.1 crore in a financial year, then you will have to get a tax audit done in order to arrive at the taxable income. The 30th of September of any assessment year is the due date by which you are supposed to file your audit report. Moreover, if a tax audit is applicable to your business, then 30th September is also the due date for filing returns. On the other hand, in case you do not need a tax audit then the tax filing due date is 31st July of the assessment year.
Also, when you are running a business and know that your turnover for a financial year will be less than Rs.2 crore, you can apply for a presumptive taxation. As specified under Section 44AD of the Income Tax Act, you are allowed to declare 8% profits for non-digital transactions or 6% profits for digital transactions, whichever is applicable, to presumptively file your returns on an annual basis. However, you cannot use this tool if you are an insurance agent or run a business where you earn income via commission of any kind, or when you are running a business that involves hiring and leasing of goods carriages.
How to save income tax under Section 43B
Along with presumptive tax declaration there are a list of heads through which you can save tax. Here is all you need to know.
- Under Section 43B(a) you can claim any tax, duty, cess or fees you pay as a deduction
- Under Section 43B(b) you can claim any contribution to provident fund/superannuation fund/gratuity fund or welfare fund as a deduction.
- Under Section 43B(c)you can claim any bonus or commission paid to employees, which would not have been payable as profit or dividend, as a deduction
- Under Section 43B(d) you can claim interest on loan or borrowings from public financial institutions, state financial institutions, etc. as a deduction
- Under Section 43B(e) you can claim interest on loan or an advance from a bank as a deduction
- Under Section 43B(f) you can claim payments made towards leave encashment
- Under Section 43B(g) you can claim any sum payable to the Indian Railways for the use of railway assets
Income tax saving tips
Here, are a few other tax-saving tips to help you save tax on the income from your business or profession.
- When compiling your books for the financial year you must always keep an eye on entering the right profit and income
- Do not forget to add amounts that account for a recovery against any earlier loss and expenditure arising due to a trade you may have done earlier
- Include sale proceeds from your assets
- Mention bad debt recovery in your books
- Mention expenditures that may have occurred owing to payment of rent and insurance of asset, machinery, etc.
- Do not forget to claim depreciation on buildings, machinery, plant or furniture (tangible assets and know-how), patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature (intangible assets) under Section 32(1)(ii)
- You can also claim an investment allowance for investment in new plant and machinery if your manufacturing unit is set up in a notified backward area in the state of Andhra Pradesh, Bihar, Telangana or West Bengal (subject to certain conditions) under Section 32 AD
- You can also claim a deduction under Section 35AD (subject to certain conditions) if your business activity is part of the following list:
- Setting up and operating a cold chain facility
- Setting up and operating a warehousing facility for storage of agricultural produce
- Building and operating a hospital with at least 100 beds for patients anywhere in India
- Developing and building a housing project under a notified scheme for affordable housing
- Production of fertiliser in India - You can also claim a deduction under Section 37(2B) for the expenditure you incur on any advertisement, be it in the form of souvenir, brochure etc. However, the same published by a political party shall not be allowed as deduction.
Apart from these, you can also check the Indian Income Tax website from time to time to know the expenses and deductions allowed on income from your business or profession to reduce your tax liability considerably. In order to save tax, you can also opt for common tax-saving investments or loans, like a home loan or ELSS, to claim further deductions. In case of this example, this amounts to Rs.1.5 lakh under the Section 80C.
These are some of the common ways in which you can save tax on income from your business or profession, but there are more parameters for you to consider. So, before filing your tax or when making your accounting books for the financial year, do take help from a tax expert or check the Income Tax of India’s website to know about all the tools that are at your disposal.
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