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Sole Proprietors are the most common type of business owners running businesses in India. Such businesses are called sole proprietorships and are usually run and managed by single owners known in Income Tax as Individual tax payer. This being business run by single person, income tax rates of individual are applicable and some times due to this individual is taxed at higher rate as personal income along with business income is clubbed in individual’s hand and return is filed.
In this article we will discuss 5 most important tax saving ways for sole proprietor.
Sole proprietor may be earning income from salary, business, rental income (Housing Income/Loss), other sources like interest, share trading income, etc.
In short sole proprietor is the only person who can earn income under all heads of income as per income tax.
So let us understand, what are those 5 most effective ways to save tax for sole proprietor
1. Proper maintenance of books of accounts of business
Proper book keeping is the key of successful business. Now a days with increased tax regulations and complexity of GST and other regulations, it is becoming difficult to handle books of accounts without proper guidance and knowledge. Sole proprietor is the single person handling all sale, purchases and administration, There are so many things sole proprietor is looking at to run business and with all those things, at some point of time one thing is neglected and that is accounting. Without proper business accounting no one can run business successfully, because accounting is foundation of successful business because it gives you idea about how your invested money is giving you returns. Thus one must take care while maintain books of accounts. One should maintain books of accounts at regular intervals.
Some of the basic things to keep in mind while maintain books of accounts are explained here. For detailed analysis refer our article “Tax saving tools for Sole proprietor”
- Record every expense related to business, no matter how small it is. For better way to avoid non recording of cash expenses, one should always take receipt of payment made for business purpose and that too in the name of your firm in case you have given any name to your firm and punch it in your expenses file of business.
- For all payments other than cash mode, always use business account only for making payment if you have business bank account.
- If you are planning for expanding business and want to buy some machinery or other things which are costly, instead of using own funds, you can borrow funds from bank by way of loan and claim interest as expense in business. But one should also look for interest % charged by bank. It should not overweight the benefit you are getting by not investing own funds. You can use this own funds at some other investment and earn income from that investment and pay interest on loan from bank. Only thing one should keep in mind, Income generated from own fund should be more than interest expense you are paying to bank.
- TDS to be deducted on expenses which are eligible for TDS, otherwise you will not get deduction of expenses you incurred in business. For details of TDS liability please read our article “TDS liability of Sole proprietor”
- Stock valuation is another important point to be considered for maintenance of books, Stock value as on year end to be calculated properly by sole proprietor.
2. Digital Transaction
- Digital transaction means using online modes of payment instead of traditional cash payment method.
- Ease of doing business increases with increased digital transactions.
- Online transactions are faster and easy to use also safety is more in this kind of transactions.
- Chances of getting omission of expenses or receipts is not possible while recording books of accounts as everything is reflected in bank account. Thus it reduces paper work and also saves time as well.
- Tracking receipts, payments becomes easy with low cost sitting at home just by checking bank statement. This reduces cost and helps in saving time also.
- Also if you have more digital transactions, then you will end up paying lower taxes also, as there are certain benefits announced by Government of India for businesses those opt for Digital transactions like, showing lesser profits is allowed for digital transaction businesses and many more benefits are given to opt for digitization.
- There are many assets which you use to run business like building premises, computer, furniture, some machinery, vehicle. One is allowed to claim depreciation on use of assets for business purpose and claim it as business expense.
- Money value of asset decreases over period of time due to usage. Income Tax allows this decreasing money value of any asset used in business as depreciation claim and allowed as business expense.
- Thus one should be very much aware about which assets are allowed to claim depreciation and it’s allowed expense.
- One can plan to buy asset in business name and claim depreciation on it and save tax.
- Various rates are provided under Income Tax for different kinds of assets and one can consider this as tax planning tool.
4. Creation of HUF
- HUF means Hindu Undivided Family. As discussed earlier, sole proprietor is the only person who can earn income as income from salary, house property, interest income, share trading income and other kind of income if any.
- Thus, if individual as sole proprietor plan his income properly, he can form HUF and show some income in HUF and diversify his other income and enjoy tax benefit.
- HUF can be created through deed and one need to understand it’s legal and financial requirements. HUF can be formed with members of the same family either by blood relation or by marriage.
- One can show income from Rent, Interest income or shares income under HUF and save tax.
HUF is considered as separate taxpayer in Income Tax, thus one can show income upto Rs. 250000/- under HUF without paying any tax on that income. For details of HUF, it’s Formations and tax benefits and drawbacks refer our article “ HUF- Tax saving tools, It’s benefits and drawbacks”
5. Proper planned investments to claim deductions available under Income Tax
- Under Income Tax various investments are allowed to claim as deduction from your income.
- If one properly plan it’s investments considering available deductions allowed under income tax for the said investment it can save tax in current time and also earn income through this investments in future.
- In short, Money saved today will become money earned in future if investments are planned properly.
- Also for helping society by way of donation, one can claim deductions for donations given. This will serve both purpose, helping society and tax saving for self.
- Even loan taken can also be used as tax saving instrument like Housing loan where Housing Loan Principle and Interest both allowed to claim deduction from income
- Educational Loan and vehicle loan for purchase of electronic vehicles is also allowed as deduction to the extent of interest portion paid in respect to this loans. Thus by this way, one can improve his life style and also save tax.
- Some examples of Investments which helps in tax saving are investment in
- Tax saver FD
- Children education fees
- Sukanya Samruddhi Yojna
- NPS and many more
- Some examples of Investments which helps in tax saving are investment in
All these investments will work as tax saving tools for current period and also works as future source of Income.
Money saved in Money earned. So plan your business in appropriate manner and let business earn for you.