Know your Taxes – Tax Saving tips for Startups
1. Optimum Salaries: A Pvt Ltd company must have minimum two directors. As new tax slab limit is Rs. 1.8 Lakh + 1.1 Lakh under 80C benifits + 15,000 under medical insurance. Hence, a director can easily take upto 3.05 L as salary and still file nil return (ie pay zero taxes). Here it is important that you must invest the 1.1 L amount either in ELSS schemes (ie mutual funds with insurance option and a lockin period of three years) or do a Bank FD for five years or buy a insurance policy. Also, medical insurance amount is the health insurance premium which you pay. The rule in medical insurance is For you & your spouse upto 15,000 is non taxable. Then if you are getting your parents also insured by paying yourself their health insurance premium, you can avail benifits of additional Rs. 20,000 ie total Rs. 35,000. The above rules are same for any individual. Moreover, if any person is above 60 yrs, the basic limit is Rs. 2.5 L instead of Rs. 1.8 L.
2. Expenses: All expenses like Telephone, Petrol, Traveling, Hotel Stay, Driver etc. can be reimbursed or even directly paid by the company, provided proper bills have been generated. Normally its wiser to generate the bills directly in the name of company itself. No taxes will be applicable on the directors and for company these will be expenses which reduces the company profits. So, taxes will be saved at the rate of 30% of the amount shown.
3. Depreciation: It is one of the most useful ways of saving taxes. Its normally better to purchase assets like say Car, Computers office items, mobiles, laptops and sometime even fixed assets like office, land etc. in company name as the company gets a depreciation on them. The rate of depriciation is normally double if purchase has been made on the first half of the financial year (before 30th september) than what it is in the second half. For ex. If you purchase a laptop for Rs. 50,000 in the name of company before sep 30, company will get 60% depreciation first year and all years after that till the laptop’s value beocmes Rupee 1. So, first year 60% of Rs. 50,000 ie Rs. 30,000 will get reduced from company profits and it will save Rs. 10,000 in taxes. Next year, laptop will be valued at Rs. 20,000 (current value- depreciation) and 60% of this amount will be the depreciation. But if you purchase the same in individual’s name, it is part of your profits and you pay complete tax on the same.
4. Service Tax/Sales Tax/VAT Input: All of us have internet connection, telephone bills etc. Always have them in company name. First the complete expense will be borne by the company and tax will be saved at rate of 30%. Also, the serive tax amount which you have paid to these companies will be considered as input for your company and is not required to pay to government. For ex. let us say you have total five Tata Photon Plus connection with bill amount Rs. 10,000 per month. The Service tax you have already paid to Tata Photon Company will be 10.30% of Rs. 10,000 say Rs. 1,000. When your company is billing your customers, it is collecting service tax at the same rate. Let us say that month, your company has collected service tax of Rs. 6,500. Then, the above mentioned Rs. 1,000 will be reduced from this as your service tax input and only Rs. 2,500 is required to be paid to the givernment. Believe me, this small looking step itself will increase your profits by at least 15-20%.
5. Mode Of Direct Payments to Directors:Company can pay regular salaries to directors. If the salary is more than 3 L, TDS has to be deducted by the company adn paid to the givernment. It can also, pay rentals, to the directors, if it is using the premises of directors (lot of startups operate from their own houses or small offices), for which TDS is needed to be paid. It can also pay Consultation Fee to the directors for any work for which also the TDS will be applicable. Lastly, company can pay dividends to the directors at the end of financial year out of its profits. The dividends will be in proportion of shares allocated to the directors and will be taxable at the directors end as income. Pls note Dividends are totally different from “commisions”. Dividends are a part of profit payable at the end of financial year as a part of distributing the profits of the company and has to be given to all directors in propornate manner.It can be paid max. twice and is 100% taxable to them and also Board of Resolution has to be passed by all directors for the same. While commisions are actually same as “consultancy fee” which can be paid any time through out the year to any one or more directors by deducting the TDS.
6. Restrictions to Payments to Directors: Not more than Rs. 20,000 can be paid in cash to any director.
7. Rentals: This is a great way of saving taxes. If you own a premises, and your company is operating from the same then if you don’t claim a rentals, the compete amount will be taxable at 30% from the company, which will be treate as its profit. While, the property is in your name or in your parents/any relatives name, company can pay rentals after deducting the TDS applicable. In this case, a maintenance cost of 30% of rentals can be shown for which no bills are needed and the tax will be applicable only to the rest amount. It will save a lot. Moreover normally the houses/properties are in the name of our mothers/wifes who are non-working in which case, even TDS will not be applicable upto tax bracket limit.
8. Salary to Family members: One of the most useful way of taking out profit from the company. You can pay salaries to your non-working family members/relatives and friends too by making them as your employees.
9. Expenses for Company: It can vary from puja expenses in the office, newspapers, office materials, water expenses, electricity expenses, telecom expenses, security expenses etc. These can be claimed by teh company and not by the directors. So, proper bills will be needed which should be in the name of the company.
10. TDS: TDS is Tax Deduction at Source. This is the tax your company is responsible to deduct from all vendors, contractors, suppliers, directors, employees etc. if the payment is more than Rs. 20,000 in a year. Let us say company has paid Rs. 5 Lakh as salary to you as a director, it will calculate the tax slabs and what is the tax amount you have to pay. Say it comes to 24,000 Rs. Then it will deduct Rs. 2,000 each month from your salary and pay to the government on your behalf. At the end of financial year, it will issue TDS certificate to you, with which you can reduce your tax amount. ie say if you need to pay total Rs. 40,000 as taxes and you have TDS certificates worth Rs. 24,000 you will pay only Rs. 16,000 more in taxes as the rest is already paid.
CEO, Vyom Technosoft Pvt Ltd.