It is that time of the year when tax planning is taken up like ants preparing for winter and the amount of business expenditure claimed skyrockets. Welcome to the season of ITR Filing. Everyone looks to cut back on their taxes. The most common way to do it is to show more tax deductions and claim exemptions. Generally, deductions are not allowed for capital expenditure and personal expenditure but are allowed for business expenditure. Further, what is included in business expenditure is complemented with other deductions and exemptions. Startups in particular, with the help of the Startup India Action Plan, have got a big tax boost. So, lets look at some of the less well-known reasons for tax deductions:
1. Entertainment Expenses:
Suppose you take a client out for lunch and discuss certain business proposals, you claim the entire amount as deduction. Taking out clients out for meals and other entertainment expenses will be tolerated to a certain extent. If you claim too high a deduction, then the taxman will come down hard on you. Remember, you must discuss something about the business. You cannot spend the entire time talking about each other’s children or any other irrelevant issues. You need not spend the entire meal discussing business but it must be involved somewhere, whether in the beginning, middle or the end of the meal. These expenses are 100% deductible under Section 37(1) of the Income Tax, Act, 1961.
Suppose you take a client out for lunch and discuss certain business proposals, you claim the entire amount as deduction. Taking out clients out for meals and other entertainment expenses will be tolerated to a certain extent. If you claim too high a deduction, then the taxman will come down hard on you. Remember, you must discuss something about the business. You cannot spend the entire time talking about each other’s children or any other irrelevant issues. You need not spend the entire meal discussing business but it must be involved somewhere, whether in the beginning, middle or the end of the meal. These expenses are 100% deductible under Section 37(1) of the Income Tax, Act, 1961.
2. Charitable Donations:
Donations to certain funds and charitable institutions (not wholly of a religious nature but including any notified games or sports institutions and associations)like the Prime Minister’s Welfare Fund etc.can always be claimed as deductions to reduce your tax liability. Donations to some funds, charitable institutions, etc. as specified in Section 80G(1) of the Income Tax, Act, 1961 are 100% deductible or the same in aggregate are deductible to the extent of the amount donated plus 50% of the aggregate. In respect of funds, charitable institutions etc. specified in Section 80G(2) [not including those referred to in Section 80G(1)] can be claimed to the extent of 50% of the aggregate.In case of an aggregate of the sums referred to in sub-Section 2(a)(iv), (v), (vi), (via) and (vii) or 2(b) or 2(c) exceeds 10% of the gross total income (as reduced by all other exemptions and deductions available, if any), then no deduction can be claimed on the excess amount. But remember that to take the help of any of these provisions, any amount exceeding Rs.10,000/- must be paid by any mode other than cash.
Donations to certain funds and charitable institutions (not wholly of a religious nature but including any notified games or sports institutions and associations)like the Prime Minister’s Welfare Fund etc.can always be claimed as deductions to reduce your tax liability. Donations to some funds, charitable institutions, etc. as specified in Section 80G(1) of the Income Tax, Act, 1961 are 100% deductible or the same in aggregate are deductible to the extent of the amount donated plus 50% of the aggregate. In respect of funds, charitable institutions etc. specified in Section 80G(2) [not including those referred to in Section 80G(1)] can be claimed to the extent of 50% of the aggregate.In case of an aggregate of the sums referred to in sub-Section 2(a)(iv), (v), (vi), (via) and (vii) or 2(b) or 2(c) exceeds 10% of the gross total income (as reduced by all other exemptions and deductions available, if any), then no deduction can be claimed on the excess amount. But remember that to take the help of any of these provisions, any amount exceeding Rs.10,000/- must be paid by any mode other than cash.
3. Contributions to a political party:
Deduction in respect of contributions given by companies to political parties.
Under Section 80GGC, if you contribute any amount to a recognised political party, you can claim a tax deduction ranging from 50% – 100% of the amount for individuals and companies (under Section 80GGB) but to be eligible for deduction companies must not contribute by cash. One can contribute up to 10% of one’s gross total income to a political party.
Deduction in respect of contributions given by companies to political parties.
Under Section 80GGC, if you contribute any amount to a recognised political party, you can claim a tax deduction ranging from 50% – 100% of the amount for individuals and companies (under Section 80GGB) but to be eligible for deduction companies must not contribute by cash. One can contribute up to 10% of one’s gross total income to a political party.
4. Travel Costs:
Any travel expenses that you incur for the purpose of any meetings, discussions or for the benefit of business can be claimed as deduction. You may include side trips to friends or family but then the amount deductible will reduce. Again to avoid disputes with the taxman, it is advised that expenses claimed be reasonable.
Any travel expenses that you incur for the purpose of any meetings, discussions or for the benefit of business can be claimed as deduction. You may include side trips to friends or family but then the amount deductible will reduce. Again to avoid disputes with the taxman, it is advised that expenses claimed be reasonable.
5. Expenditure on Scientific Research:
You will be aware that you are allowed deductions in case expenditure incurred on scientific research for your business but you will also be allowed a similar deduction,under Section 35 of the Income Tax Act, 1961, even if you donate to a University / College / School / Research association unrelated to your business and doing scientific research, including its main objective, in a field completely different from your business.
You will be aware that you are allowed deductions in case expenditure incurred on scientific research for your business but you will also be allowed a similar deduction,under Section 35 of the Income Tax Act, 1961, even if you donate to a University / College / School / Research association unrelated to your business and doing scientific research, including its main objective, in a field completely different from your business.
Scientific Research has been defined under Section 43(4) of the Income Tax, Act, 1961 as:
“an activity for the extension of knowledge in the fields of natural or applied sciences including drugs and pharmaceuticals, agriculture, animal husbandry or fisheries”. Such an activity can improve efficiency which in turn increases the productivity of the process. So, in order to encourage people to enhance productivity, the government provides certain tax incentives, under Section 35 of the Income Tax, Act, 1961, by way of deduction for expenditure incurred in respect of Scientific Research.
“an activity for the extension of knowledge in the fields of natural or applied sciences including drugs and pharmaceuticals, agriculture, animal husbandry or fisheries”. Such an activity can improve efficiency which in turn increases the productivity of the process. So, in order to encourage people to enhance productivity, the government provides certain tax incentives, under Section 35 of the Income Tax, Act, 1961, by way of deduction for expenditure incurred in respect of Scientific Research.
When you contributean amount for carrying out scientific research to a Central Government approvedhaving ‘scientific research’ (even if the field of research of such institution is different from your business) as its main objective. In case of:
(1) Any Amount contributed (other than by a company registered in India) will be allowed a deduction worth 1.75 times the amount donated.
(1) Any Amount contributed (other than by a company registered in India) will be allowed a deduction worth 1.75 times the amount donated.
(2) Any Amount paid to a Company registered in India will be allowed a deduction of 1.25 times on the amount donated.
(3) Any Amount contributed to a Central Government approved University/College/School/Research association carrying out Social or Statistical research as its main objective will be allowed a deduction of 1.25 times on the amount donated.
(4)Any amount contributedto anapproved National laboratoryor a University or an IIT or to a specified person with a specific direction that the amount shall be used for the purpose of scientific research, shall be given a weighted deduction of 2 timeson the amount donated.
National Laboratory is any laboratory functioning at a national level under the auspices of:
(1) Indian Council of Agricultural Research
(2) Indian Council of Medical Research
(3) Council of Scientific and Industrial Research
(4) Defence Research and Development Organisation
(5) Department of Electronics
(6) Department of Bio-technology
(7) Department of Atomic Energy
(1) Indian Council of Agricultural Research
(2) Indian Council of Medical Research
(3) Council of Scientific and Industrial Research
(4) Defence Research and Development Organisation
(5) Department of Electronics
(6) Department of Bio-technology
(7) Department of Atomic Energy
In all the above deductions, you will be entitled to claim deduction even if, after donation, the approval granted has been withdrawn.
These deductions, along with the common ones like rent, depreciation, investments,interest on loans, etc. can help you save a considerable amount of tax every year.
But all these deductions are subject to an upper limit. The total amount of all the deductions combined cannot exceedyour gross total income.
You will not be able to claim any of these deductions in case you cannot prove it. To be able to prove it, you need records of all the receipts of everything that you are spending your money on. That could include any tickets, receipts of vehicles hired, food eaten, hotel stays, work done during business meals and anything else you can think of. Especially when dealing with the taxman, you can never have more receipts than necessary so keep a record of as much as you can.
This article has been contributed by Himanshu Jain, CEO, LegalRaasta- an online portal for GST software, GST Return Filing, GST Registration, Section 8 Company Registration, Nidhi company registration, IEC Registration, Fssai License.
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