How to Save Tax in India for a Private Limited Company

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How to Save Tax in India for a Private Limited Company?

Incorporating a private limited company offers a very efficient tax structure for doing business in India. Further, in this era of startups, private limited company registrations have boomed in India as it makes fund raising a lot easier than other business constitution formats. However, when it comes to saving taxes, individuals normally use the provisions of Chapter VI-A to reduce their taxable income. However, what about private limited companies? How can a private limited company save taxes in India?
Before finding that out, it is important to understand the tax structure of private limited companies.

Tax Structure of Private Limited Companies

Before understanding how private limited companies can save taxes, let’s understand the tax structure for the companies:

  • Income Tax: The companies shall be liable to pay income tax @ 30%. However, if the turnover or gross receipts of the company in the previous year 2018-19 does not exceed Rs. 400 crores, then the tax rate applicable to the company shall be 25% instead of 30%. Further, if the company satisfies the conditions as specified under Section 115BAA or 115BAB, then it can pay tax at presumptive rates of 22% and 15% respectively.
  • Surcharge: The domestic companies shall be liable to pay a surcharge @ 7% if their net income exceeds Rs. 1 crore but does not exceed Rs. 10 crores. However, if the net income exceeds Rs. 10 crores, then the surcharge rate shall be 12% instead of 7%. 
  • Cess: The companies shall be liable to pay Health and Education Cess @ 4% calculated on the tax amount payable by the company.
  • Minimum Alternate Tax: As the companies claim deductions under various provisions of the income tax act, the tax liabilities reduce significantly. Therefore, the government introduced provisions of Minimum Alternate Tax (MAT) that ensure that the companies pay a minimum specified amount as tax. MAT shall be calculated on book profits as against the normal income tax that is calculated on the taxable income. The companies shall be liable to pay Minimum Alternate Tax @ 15% plus applicable surcharge and cess in case the income tax payable on taxable income is less than the MAT. 

Tax Saving Tips for Private Limited Companies
The above discussion highlights the importance of proper tax planning for saving tax in private limited companies. Here are some of the useful tips for the same:
Remuneration to the Founders and Directors: Directors and founders are responsible for operations and management of the affairs of the company. Therefore, one way out to save taxes for private limited companies is to pay salaries to the directors and founders. Salary paid to directors is allowed as a deduction under the income tax law.
Sitting Fees to the Directors: Directors receive sitting fees for attending the board meetings of the company. Board meetings are where the board of directors makes all the important decisions concerning the company. The sitting fees paid to directors are also allowable as a deduction to the company.
Interest on Loans Taken from Founders and Directors: If the directors and founders have extended loans and advances to the company, then the company can pay interest on such loans taken from the director and claim it as an expenditure under the income tax law to save taxes.
Preliminary Expenses: Preliminary expenses typically include those associated with the incorporation of your private limited company. Under the income tax law, preliminary expenses also include the expenses associated with setting up a new unit or extension of the undertaking. The preliminary expenses are allowed as deductions under the income tax law in the form of amortization over a period of 5 years.
Insurance Premium Payments: The insurance premiums paid by the company for its directors and employees are also tax deductible under the income tax law. Whether it’s group medical insurance coverage or property insurance, premiums paid by the company are allowed as a deduction. 
Rental & Lease Expenses: If the company has taken any property on rent or lease, then the company can claim the deduction of such rental or lease expenses as these are directly related to the business that the company operates.
Meeting Expenses: If the company has organised any meeting, whether it’s a board meeting, annual general meeting, extraordinary general meeting etc. then such expenses can be claimed as deductions under the income tax law as these expenses are primarily undertaken for the purpose of the business.
Entertainment Expenses: It is quite common for businesses to throw business parties. All the expenses associated with such parties can be claimed as deductions under the income tax law.
Depreciation: Income tax law has specified fixed rates for claiming depreciation on the value of the assets. The company can claim depreciation of the assets that it holds as per the rates specified in the income tax act.
Director’s Vehicle Expenses: If a vehicle has been provided to the director for travelling and commutation, then all the expenses associated with fuel, repair as well as maintenance can be claimed as deductions under the income tax law.
Skill Development Expenditures: If a company incurs any expenditure on a skill development project, then it shall be allowed as a deduction equal to the amount of expenditure so incurred. However, no deduction shall be allowed in respect of the cost of land and building.
Donations: Usually, the company makes donations to various funds and organisations as part of their social responsibility. If the company makes donations to any charitable organisation or approved funds, then it can claim a deduction for the donations so made. Further, donations made to the political parties and electoral trusts are also allowed as a deduction under the income tax act.

Thus, there are various avenues through which a private limited company can save taxes in India. However, you should consult a tax expert to obtain an in-depth understanding and thorough tax planning for your private limited company. Consult your eAuditors to help you operate in the most tax-efficient manner.

Author : Dipen

Date     : 09-Jul-2022