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How to save on Tax for small businesses?

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Knowing the various tax exemptions and making adjustments to use them can help one save taxes

Action Plan

  • Choose the appropriate accounting method between 'cash' and 'accrual' for a favourable tax outcome
  • If you run a small business from home, you can get tax cuts on recurring business expenses
  • Exploit higher exemption limits for women and senior citizens by having business in their name

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A rupee saved is a rupee earned, goes the maxim. This is especially true in the case of small businesses, where taxes saved through proper planning not only save costs, but also provide more cash for reinvestment. Thus, they become an important interest-free source of working capital. Deferring the tax liability can also help one earn or save interest until taxes become due.

Method of accounting. Choo-sing the appropriate accounting method (cash or accrual), depending on things such as legal form of business, sales volume, credit terms with suppliers and customers policy, is usually effective. While businesses with large accounts receivables and overdues should prefer the cash basis, those with low accounts receivables and large current liabilities should go for the accrual method.

Inventory valuation. Cost or market value, whichever is lower, is a generally accepted principle for valuation of inventory. The first-in-first-out (FIFO) method can be preferred by businesses where inventories tend to lose their value over time. One can also change his method of stock valuation for tax purposes if the change is bona fide and consistently followed. Obsolete stock can be written off and claimed as business loss. Non-moving stock can be written down and claimed for tax deduction if evidence is produced to substantiate the amount at which it has been restated.

Business deductions. Professionals operating on a small scale from their residence can claim tax deduction for expenditure incurred on electricity, telephone, travel, conveyance, car running, maintenance and depreciation, refreshments and so on. Salary paid to spouse or family members, who render services, can be claimed for tax deduction, subject to reasonability. If the spouse possesses professional qualification, and if the child isn't a minor, the salary earned will not be clubbed with that of the owner. Gifts to clients can be claimed as promotional expenses. Bad debt is tax-deductible as long as it's actually written off in the books of accounts. It's no longer necessary to show that the debt has become bad during the year. Deferred revenue expenses amortised in books of accounts can be claimed in their entirety for tax deduction in the first year itself.

Timing asset acquisitions. Assets used for 180 days or more are entitled to full tax depreciation. In other cases, depreciation can be claimed only at half the normal rates. Asset purchases can be timed at year-end to claim at least 50 per cent tax depreciation.

Investment decisions. There is a fine line of distinction between the treatment of profits or losses on purchase and sale of securities as business income or capital gains. Factors like frequency, turnover and quantum of transactions, intention of purchase, period of holding and treatment in books need to be considered. It is also possible to hold investments partly as trading assets and partly as capital assets. The distinction is relevant as the rate of tax on capital gains could be nil, or 10, 15, 20 or 30 per cent, depending upon the nature of security, period of holding and the medium of the transaction. Further, a capital loss cannot be set off against business income. There has been a series of judicial rulings on this issue, which were decided on the facts of each case. Business owners can plan their transactions and minimise tax costs.

Using tax slabs to advantage. The relatively higher basic exemption limits for women and senior citizens can be exploited by registering businesses in the name of such family members. Or, the benefit of tax-deductible interest expense can be availed by obtaining a loan for the business from such family members.

Presumptive taxation. Eligible businesses having turnover below Rs 60 lakh can enjoy this benefit, whereby 8 per cent of the gross turnover is deemed taxable business income. For partnership firms, the deemed profit is further reduced by remuneration payable to partners, subject to limits. Such businesses are exempt from advance tax payment, which augments cash flow.

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Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

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Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver MutualFunds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

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