7 Tax-saving tips every SME owner must know

7 Tax-saving tips every SME owner must know

29 March, 2023

With the charm of owning a small business also comes some challenges. Not all entrepreneurs can invest heavily in their businesses. If you invest less, beyond a point, the returns remain low. But many expenses may remain more or less the same at any revenue level – say, fixed costs like the workers' monthly payroll and machinery maintenance.

One area where SME owners can plan well and limit their expenses is taxes. Paying income tax can often be a huge liability for business owners. SMEs can sometimes end up paying more tax than they need to if they are not aware of specific facts. Let us look at some strategies that can help SMEs save on taxes.

  1. Keep track of business expenses: The Income Tax Act, 1961 permits certain tax deductions for small companies on their business expenses such as phones, vehicles and drivers, and electricity. These deductions are allowed provided the expenses are business-related, and appropriate records of the transactions are maintained.

  2. Devaluate the preliminary expenditure: As per Section 35D of the Income Tax Act, 1961, you can claim the preliminary expenses incurred in starting up the business-like

  • Surveys

  • Drafting memorandums

  • Stamp duty

  • Engineering costs and more

You can claim the deductions in five equal instalments for the first five years of operation. These expenses come under the head of capital expenditure for starting a new business.

  1. Claim additional depreciation benefits: Another benefit you can avail of under Section 32(1)(iia) is to appeal for additional depreciation of 20% on any new machinery installed during the year. You can avail of this depreciation benefit only for the first year of operation of the new machine, in addition to the regular depreciation claimed. To enjoy all these benefits, you need to keep a proper record of your accounts.

  2. Set up a home office: To cut down on operating costs, you can turn a small and convenient space in your home into an office for your business. This way, you can claim deduction on utility bills, mortgage, depreciation, and property tax. Sections 32 and 37 of the Income Tax Act, 1961 allow you to claim these deductions.

  3. File your taxes on time: As a responsible citizen and a diligent entrepreneur, you must always pay your taxes before the deadline. In case you fail to do so, you will incur a penalty. As the owner of a small business with limited cash flow and capital, you should take care not to increase your financial liability by having to pay such penalties.

  4. Have a retirement plan ready: As you enter the later part of your career, it is vital to have a retirement plan in place that includes a clever and timely exit from your business. Create a retirement account and look for tax-friendly investment options like the National Pension Scheme. This will lower your tax burden on a personal level and insure you against any downswings in the business at a later stage.

  5. Seek professional assistance: Apart from all these strategies, it would be good to seek the help of a professional tax expert who can handle your business matters responsibly and guide you smoothly to reduce your tax burden and save you money.

It is vital to make sure you pay your taxes on time as a responsible citizen. At the same time, don't forget to take advantage of the benefits of the tax deductions provided by the law. This can be easily done if you plan your business taxes correctly. And if at any time business taxes pressurises your working capital, you can opt for an HDFC Bank business loan. Available up to ₹ 75 lakhs, this collateral-free HDFC Bank business loan can meet not only tax liabilities but your business expansion, payables and any other working capital needs.

Looking to apply for Business Loan? Click here.

To read more about Union Budget 2023-24 Announcements For MSME Sector, Click Here.

​​​​​​​*HDFC Bank recognises the challenges entrepreneurs face while acquiring capital. Thus, HDFC Bank has created MyBusiness, a one-stop solution that gives you easy access to loans, digital solutions and provides you with the essential knowledge you need to run your business. With HDFC Bank MyBusiness, you can scale up, expand your operations, and nurture your business.