Benefit from tax deductions
Under the Indian Tax Laws, any income generated by a self employed individual including writers, freelancers and independent consultants fall inside the bracket of “income from business”.
File all your work expenses (including expenses on business trips) as “business expenses”. Develop a good book keeping policy to produce vouchers/bills for documentation. You can file home office rent, Internet and phone bills, meeting and client entertainment expenses, utilities and office supplies as business expenses.
Make sure that the expenses that you have filed must be commonly acceptable (ordinary) and appropriately helpful (necessary).
You can claim depreciation on work assets like laptop, furniture, vehicles, computers and UPS. Carefully maintain bills of capital expenses are to be for future use. Write off all bad business debts following necessary protocol. You also have the option to carry forward your debts for a period of 8 years.
Steps to efficient tax planning
If you have close relatives or family members who can contribute to your business in helpful ways, you can hire them legitimately. In broad terms, you will be shifting a part of your income to your family member while also saving on taxes.
Your business will avail of a deduction under “compensation to an employee” and the amount of taxable income is reduced automatically. The concept of HUF (Hindu Undivided family) can also be used for tax savings.
Avail reasonable deductions
Normal deductions like those included in section 80 C should be availed. As an entrepreneur, you can avail of deductions through investment in PPF, Equities Linked Saving Plan, National Saving Certificates and certain kinds of fixed deposits.
If you are living and operating on rented premises, claim your rent as deductible under section 80GG. If you have purchased a house, deductions up to 1.5 Lakh can be availed on interest.
You can also claim educational fees or tuition fees for your children’s education. The sectional limit is Rs.1 lakh in this case.
Risk hedging equals Tax savings
A reasonable amount of life insurance coverage is essential for future protection to your family in absence of accumulated benefits (of employed persons). In case you have certain liabilities, you can take advantage of the “married woman Property act”.
If you enroll for a medical family floater policy having sufficient coverage (which can protect your family from major medical costs), the premiums will provide tax breaks under section 80C & 80 D.
If you are a first time entrepreneur, you are likely to have irregular sources of income. Plan your tax savings schemes in a way which will allow you to make one time payments (which you can time to coincide with your cash inflows).
The tax planning tips above are meant as an initial guide and we would always recommend that you pay for some proper tax advice from a professional who can guide you for your own specific circumstances.