What are the tax benefits for startup founders?

August 14^th 2018

Multiple and complicated tax laws and stringent compliance regulations are not conducive to small business. As per the Income Tax Act, 1961, (IT Act), earnings are classified into five categories. As a business owner, you may be interested in learning about income tax for start-ups belonging to each of these categories.
This makes it complex to adhere to a large number of tax rules and regulations. Nonetheless, some of the best ways to save income tax for startups are:

Income from house property

Here are two components of house property where you may avail of tax benefits:

Housing loan benefits:

The interest on a home loan is exempt under Section 24 of the IT Act. Additionally, principal repayment of the loan is eligible for tax deductions under section 80C.

Municipal taxes

You must pay these taxes in check and retain the payment receipts. The property tax may be deducted from your income from house property, which helps you reduce your liability.

1. 1. Income from business or profession
    
    The below mentioned components would help you gain tax benefits for your start up:
    - Maintain proper expense records
      Often labor charges in an unorganized business are paid in cash. Incorrect recording of such cash expenses increases your profits, which results in higher tax payments. It is important you maintain accurate records with signature or thumb impressions to claim deductions.
    - Tax deducted at source (TDS)
      According to the tax laws, you need to deduct TDS when you purchase certain goods or avail of services. If you do not deduct TDS, the expense is not admissible, which increases your income and tax liability.
    In addition to knowing about these tips, you must also know how to file taxes to avail of the benefits.
  2. Income from capital gains
    
    The right treatment of capital gains helps you save taxes. Here’s how.
    - Long-term and short-term capital gains tax
      When calculating capital gains tax, the investment horizon is important. For most capital assets, a holding period of three years or more is classified as long-term. The gains on the sale of long-term assets vary between the types of asset. Short-term capital gains are taxed at a flat rate of 15% when assets are sold before three years.
    - Indexation
      Indexation benefits are considered for the time value of money because an amount of INR 1,000 is not worth the same after five years. One of the best tax-saving options for long-term gains is indexation. It allows you to reduce your profit on the sale of an asset, which in turn saves tax.
  3. Income from other sources
    
    Other earnings such as interest are added to your taxable income. You may not be aware that certain exemptions on income from other sources are available. If you do not reduce these from your book profits, you may not be able to avail of these benefits. Section 80TTA allows interest on savings as a deduction for up to INR 10,000 per year.
  4. Timely tax filing
    
    Determining your income and tax liability is not sufficient. You must know how to file taxes in a timely manner. You are allowed to carry business loans forward for eight years when you file income tax returns (ITR). This benefit is available only when you file your returns on time and therefore, knowing the due date is crucial.
  5. How to invest in equity-linked saving schemes (ELSS)?
    
    In addition to knowing how to save tax on income received from different sources, you must study and invest in ELSS funds to grow your wealth over a period of time. These diversified mutual funds invest a majority of the corpus in equities and related products. You may invest in ELSS funds either as a lump sum or through a systematic investment plan (SIP).
    However, these funds have a three-year lock-in period. This means that each SIP installment is a fresh investment, which must adhere to the lock-in period. What you may not know when you look for ways on how to save tax with ELSS funds is that these schemes are EEE (exempt, exempt, exempt). This means that not only the principal investment, but also the dividends and maturity proceeds from it are tax-free under Section 80C of the IT Act.
    Compared to PPF and other fixed-income investment options, ELSS funds provide the opportunity to earn higher returns because of its market exposure. Additionally, it has the shortest lock-in period when compared to other options and is definitely one of the best tax-saving options.
    Investing is not simple and requires research. Allow our investment engine ARQ to help you with investments. This investment engine adopts an automated process free of human bias to match the best products to your personal needs.