15 tips for an Entrepreneur to Save Tax – How to save tax as a Freelancer

Doing business is not easy and definitely not cheap. Every penny counts and amongst the constant competition fighting for market share isn’t easy. 90% of entrepreneurs end up paying higher taxes than they actually owe, due to a lack of expertise. As an entrepreneur, you have income from almost every head except for the head ‘Income from Salaries. You’ll end up paying high taxes to the government if you are unaware of the various tax-saving options. Managing your tax strategy, the right way is essential to your efforts at saving money.

As an entrepreneur, the key is to take advantage of every deduction you can. You wouldn’t want to get into trouble because of your taxes. Therefore, complying with tax law is a must. Not complying could end up costing you more than what you even can imagine.

15 tips to save tax

1. Business Expenses

You can claim for costs incurred due to vehicles, phones, electricity, driver’s charges, etc. Any expense incurred while operating your business can be claimed as cost. Expenses incurred even before the commencement of your business are deductible under Section 35D of the Indian Income Tax Act.

2. Deduct your home office

If you are operating your business from home, then you can deduct expenses arising from this.

3. Travel and Hotel Expenses

Any work-related travel and expenses incurred during the travel should be accounted for in the company’s account.

4. Have minimum cash transactions

Daily transactions over and above Rs 20,000 to a person should be avoided. As this cap is laid by the Indian Income Tax Act, such transactions get nullified. You will end up paying higher than what you would have to.

5. Depreciation

Indian Income tax act provides multiple benefits to the entrepreneur involved with manufacturing enterprises. For example, additional depreciation, specified business under section 35AD, etc. In case you install new equipment; in the year of installation, you can claim additional depreciation up to 20%.

6. Bad Debts

Any bad debts, or part thereof, that has been written off as irrecoverable in the accounts of the taxpayer for the year is allowed as a tax-deductible write-off. However, if in the future if the sum written off is subsequently recovered, the recovered sum is taxable in the year of recovery.

7. Deduct Tax at source

Certain transactions can be tax deducted while making payments to the vendor/seller or a service provider. If one fails to do so, then they end up paying higher taxes.

8. Employ family members

The main advantage is that you’ll have trusted people working for you. Hire family members and pay them salaries like an employee. The company can show this salary as an expense and can set it off from the taxable income.

9. Reinvest profits to market your business

Marketing expenses are tax deductible. And in the era of digital marketing where the reach to the customers is multifold, it is advised for you to spend towards marketing your business. This will help in tax saving and also increase your customer base.

10. Medical Insurance Premium

As per Section 80D of the Indian Income Tax Act, medical insurance premium up to Rs 25,000 can be claimed by the entrepreneur. This can be claimed for the entrepreneur’s dependents – spouse, children and parents.

11. Donate

Donations made to registered charitable trusts are tax deductible. However, do not just donate for this purpose, make this a habit. Ensure that you always give back to society in whichever way possible. Good deeds never go in vain.

12. House Loan

Under Section 80C, you can claim deduction up to Rs 1,50,000 per year for the interest on your house loan. Therefore, if your pan card is linked to your start-up, then you can avail for this deduction.

13. Distribute profits to partners in a partnership firm

In a partnership firm, if the partners decide to distribute the profits, then the partners need not pay any tax. This is because the partnership firm has already paid taxes on the profits.

14. Plan and pay for your retirement

Retirement is basically a goal that each one of us has, and it’s not something where we can negotiate or compromise on. Invest in avenues that help you retire peacefully and also give you tax benefits. For example, Public Provident Funds or National Pension Schemes.

15. Track your carryover deductions

Track credits or deductions that may not be fully used in one tax year and are eligible to be carried over into future years. These can include items like net operating losses, capital losses, charitable contributions and home office deductions.

Don’t make small businesses more financially draining than it already is. As the backbone to your start-up make sure you are recording all transactions and are not trying to evade tax. Therefore, depending on the nature of your business, make sure you do your tax planning effectively.