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  • HOW TO SAVE TAX IN A PRIVATE LIMITED COMPANY

    ABSTRACT

    This article discusses different legal and strategic about how to save tax in a Private Limited Company in India. The article starts with discussing major tax exemptions for companies in India, Section 80-IAC, and Section 80JJAA. It then highlights the necessity of compliance in the form of tax audits for a private limited company, especially under Section 44AB of the Income Tax Act. The article also discusses requirements related to professional tax for a private limited company, applicable at the state level for both employers and employees.

    A major part is devoted to tax-saving techniques like claiming depreciation under the Income Tax Act, and utilizing business-related expenses like director remunerations, sitting fees, rent, preliminary expenses, and family member remunerations. It also emphasizes deductions through different operational expenses like entertainment, meetings, and vehicle costs. Through these steps, Private Limited Companies can legally reduce tax liability while remaining in accordance with Indian tax regulations.

    INTRODUCTION

    A Private limited company is formed lawfully with limited liability or legal protection for its shareholders but that places restrictions on its ownership. Amongst many obligations, paying tax is one of the main obligations of a company.

    HOW TO SAVE TAX IN A PRIVATE LIMITED COMPANY:

    1. UNDER TAX EXEMPTION FOR COMPANIES IN INDIA

    One of the most effective ways to save tax is by availing various tax exemptions for companies in India. The government offers several benefits to startups and new private limited companies, such as:

    • Startup India scheme: eligible startups can get a tax holiday for consecutive years under section 80 IAC.
    • Income tax rebate under section 10 (38): long-term capital gains on shares and securities can be exempt under certain conditions.
    • Deduction under section 80 JJAA: for companies that hire new employees.

    2. MAINTAIN COMPLIANCE THROUGH TAX AUDIT FOR A PRIVATE LIMITED COMPANY

    Every private limited company must conduct a tax audit for a private limited company under section 44AB of the Income Tax Act if:

    • Annual turnover exceeds Rs. 1 crore for business (or Rs. 50 lakhs for professionals)
    • Companies are opting for presumptive taxation under section 44AD/44ADA and not declaring profits as per the norms.

    3. PAY ATTENTION TO PROFESSIONAL TAX FOR A PRIVATE LIMITED COMPANY

    Another mandatory tax is the professional tax for a private limited company. Levied by respective state governments.

    • Deducted form the employer and the employee depending on the state’s laws.
    • Must be paid by both the employer and the employee depending on the state’s laws.

    4. USE DEPRECIATION UNDER THE INCOME TAX ACT

    Claiming depreciation under Income Tax Act is one of the most effective ways to reduce taxable income. Section 32 allows companies to depreciate assets such as:

    • Machinery and equipment
    • Office furniture
    • Computers and vehicles

    5. ADDITIONAL TIPS ON HOW TO SAVE TAX IN A PRIVATE LIMITED COMPANY IN INDIA

    Salary to Director:

    • The simplest way to save taxes is to pay their directors.
    • Since you founded the business, you have the option to divide the profits as a salary as opposed to a dividend.
    • Salary is the private limited company’s authorized expense.

    Sitting fees to the director:

    • A director may receive a sitting fee from the company for attending board or committee meetings; the amount may be determined by the board of directors and cannot exceed one lakh each board or committee meeting.
    • That is exempt in the hands of an individual under the specified limit and can be claimed as “Expenditure” in the hands of a business.

    Depreciation on assets:

    • When an asset is purchased, it is shown on the company’s balance sheet as a capital asset.
    • In this manner, the purchase item will show up on the asset side of the balance sheet rather than the profit and loss statement.

    Preliminary expenses:

    • The founder of a private limited company bears the costs associated with the firm’s creation, which are known as preliminary expenses.
    • A number of costs are incurred both before and after the incorporation of a private limited company.
    • These costs are professional fees paid for the creation of the AOA and MOA. Document printing expenses, ROC fees, stamp duty, etc.

    Rent expenses:

    • All you need to do is create a rent agreement in the owner’s name, begin transferring the rent, and record the rent expense in the company’s books
    • if the location listed as the registered address of the business is in the name of the director or any of the director’s relatives.

    Salary expenditure of a family member:

    • When family members work for the company, begin recording their pay as an expense in the accounts of the business.
    • In this manner, you can bring your earnings home once more.

    Entertainment expenses:

    • Then there is the most exciting business expense.
    • You should periodically celebrate your company’s accomplishments.
    • By recording the expense in your books of accounts, you can save 30% on taxes.

    Meeting expenses:

    • Expenses for attending a sporting event, a theatre performance, or a client meal are deductible.
    • Additionally, for professional purposes when you interact with others, attend numerous meetings, and travel to other locations.
    • You can lower your taxes by properly recording and keeping track of all such expenses.

    Director’s vehicle expenses:

    • A director’s car is typically used for business travel and meetings.
    • Fuel consumption and vehicle maintenance can be recorded as business expenses in the company’s records since they are specifically related to the business.

    CONCLUSION

    How to save tax in a private limited company in India is the most crucial question that has to be dealt with as it effective tax planning is essential for the financial health and sustainability of a Private Limited Company in India. By taking advantage of government-provided tax exemptions for companies in India, maintaining proper compliance, tax audit for private limited company and strategically recording legitimate business expenses, companies can significantly reduce their tax burden while staying within legal boundaries.

    From utilizing startup tax benefits and claiming depreciation under the Income Tax Act, including director salaries and everyday business expenses, there are numerous opportunities to optimize tax outflows. Apart from these doing professional tax for a private company is also very important.

    However, it’s important that all such practices are well documented and compliant with prevailing laws to avoid penalties. Seeking professional advice and maintaining transparent financial records can ensure both savings and long-term business stability. Ultimately, smart tax management not only improves profitability but also fosters growth and reinvestment in the company.

  • STARTUP INDIA REGISTRATION: A COMPREHENSIVE GUIDE

    STARTUP INDIA REGISTRATION: A COMPREHENSIVE GUIDE

    India is one of the fastest growing economies worldwide and one of the vital reasons for that is India’s startup ecosystem which ranks third globally in the Startup Ecosystem Index. While building a startup may seem easy and exciting at first, the same is requires navigating several legal and administrative challenges. In order to aid startups in all its problems, Indian government launched the Startup India Scheme in the year 2016 with the aim to reduce the regulatory burden on Startups, thereby allowing them to focus on their core business and keep compliance costs low. This comprehensive guide will help startup owners to navigate the process of Registration under Startup India.

    ELIGIBILITY FOR STARTUP INDIA REGISTRATION

    Not all businesses are eligible for registration under the Startup India Scheme. The eligibility criteria for registration under Startup India include:

    1. Business Structure: In order to be recognised as a Start-Up by DPIIT, a business must be incorporated as a Registered Partnership, Limited Liability Partnership (LLP) or Private Limited Company.
    • Business Age: The period of existence and operation of the business should be less than 10 years from the date of incorporation.
    • Annual Turnover: The business should not have a turnover of more than 100 crore for any of the financial years since its Incorporation.
    • Original Entity: Entity should not have been formed by splitting up or reconstructing an already existing business.
    • Innovative & Scalable: Should work towards development or improvement of a product, process or service and/or have scalable business model with high potential for creation of wealth & employment.

    STEPS INVOLVED IN STARTUP INDIA REGISTRATION

    Due to the advent of digital platforms, registering under Startup India has become extremely simple and convenient. Startup India Registration includes several steps, almost all of which, can be completed through online government portals. Key steps to register your business under Startup India include:

    Incorporation and Documentation: 

    Choose your desired business structure either Partnership, Limited Liability Partnership (LLP) or Private Limited Company and incorporate your business. Obtain all necessary documents like Certificate of Incorporation or Partnership Registration as applicable, PAN etc.

    Register with Startup India: 

    Visit the Startup India website https://www.startupindia.gov.in/content/sih/en/startup-scheme.html, and click the ‘Get Recogonised’ followed by the ‘Apply Now’ button. After this, user will be redirected to the https://www.nsws.gov.in portal.

    • Login: Go to the NSWS website (nsws.gov.in), and click on ‘Login’. Select ‘Investor Login’.
    • Sign Up: Click on ‘Sign Up Now’ and enter your details for verification.
    • Profile Setup: Set up your profile by entering your entity type and PAN card number. Verify your PAN.
    • Enter Address: Provide your postal and registered address.
    • Add Authorized Signatory Details: Add details of the authorized signatory and save the information.
    • Register as a Startup: Go to the homepage, select ‘Centre Approvals’, then ‘All Approvals’. Search for ‘Registration as a Startup’ and add it to your dashboard.
    • Apply: Go to your dashboard and click ‘Apply Now’.
    • Fill Application Form: Complete the application form with the required details, review, and submit it.
    • Access Application: You can access your application on the dashboard by clicking on the form to view the application status and the allocated DPIIT number.
    • Approval: Once approved, you can download the recognition certificate from the NSWS portal. It can also be accessed on Digilocker by searching for ‘Startup Certificate’.

    Avail Benefits: 

    Once your start-up has been recognised by the DPIIT under the startup India Scheme, you are free to avail the host of benefits provided to startups under this scheme

    BENEFITS OF STARTUP INDIA REGISTRATION

    Registration as a Start-up under the Startup India Scheme is incredibly beneficial for budding entrepreneurs as this will reduce the regulatory burden on businesses, thereby allowing them to focus on their core business activities while keep compliance costs low. Startup India registration provides benefits in different fields, details pertaining to which have been provided herewith:

    BENEFITS IN LABOUR LAWS AND ENVIRONMENTAL LAWS: 

    Businesses often place the problem of complying with meticulous and expansive labour and environmental laws. In order to help businesses navigate this tedious process, the government provided following benefits of startups:

    • Self-Certification: The government gave the option for start-ups to self-certify compliance for 6 Labour Laws and 3 Environmental Laws through simple online procedures.
    • Relaxation in Inspections: In the case of labour laws, no inspections will be conducted for a period of 5 years from the date of incorporation. Only on receipt of credible and verifiable complaint of violation, filed in writing and approved by at least one level senior to the inspecting officer, a Startup may be inspected. In the case of environment laws, startups which fall under the ‘white category’ (as defined by the Central Pollution Control Board (CPCB)) would be able to self-certify compliance and only random checks would be carried out in such cases.

    BENEFITS IN IPR REGISTARTION: 

    Innovation is the bread and butter of startups, thus it becomes all the more crucial for startups to protect their intellectual property. Protecting ideas, creations and innovation gives startups a competitive edge, which can dramatically increase its value and the value of the business. However, filing for IPR registration has historically been an expensive and time consuming process which can be out of the reach of many startups. Therefore, through the Start-up India Scheme, the government’s objective is to reduce the cost and time taken for a startup to acquire IPR, making it financially viable for them to protect their innovations & ideas and encouraging them to innovate further.

    • Fast-tracking of Startup Patent Applications: Patent applications filed by startups shall be fast-tracked for examination so that their value can be realised sooner.
    • Panel of facilitators to assist in filing of IP applications: For effective implementation of the scheme, a panel of “facilitators” are empanelled by the Controller General of Patents, Designs and Trademarks (CGPDTM), who regulate their conduct and functions. Facilitators are responsible for providing general advisory on different intellectually property as well as information on protecting and promoting intellectual property in other countries.
    • Government to bear facilitation cost: Under this scheme, the Central Government shall bear the entire fees of the facilitators for any number of patents, trademarks or designs that a Startup may file, and the Startups shall bear the cost of only the statutory fees payable.
    • Rebate on filing of application: Startups shall be provided an 80% rebate in filing of patents vis-a-vis other companies. This will help them pare costs in the crucial formative years.

    INCOME TAX EXEMPTION (80IAC): 

    One of the biggest problems faced by start-ups is the complex taxation structure & the burden of paying heavy taxation. To ease this, the government, under the Startup India Scheme, provides Income Tax exemption  to startups from paying income tax for 3 consecutive financial years out of its first ten years since incorporation.

    ANGLE TAX EXEMPTION (Section 56(2)(VIIB) of Income Tax Act): 

    Angel Tax Exemption under Section 56(2)(VIIB) of the Income Tax Act, allows DPIIT recognized startups to be exempt from taxation on investments received above the fair market value, provided the startup’s valuation aligns with government criteria. Investments from accredited investors, non-residents, Category I AIFs, and listed companies with a net worth over ₹100 crore or a turnover above ₹250 crore are exempt, with an investment limit of up to ₹25 crore for startups. This encourages investments without imposing additional tax burdens on startups.

    EASE IN WINDING UP OF THE COMPANY: 

    To make it easier for Startups to shut down or wind up operations, with the objective of allowing entrepreneurs to reallocate capital and resources to more productive avenues faster as well as to encourage entrepreneurs to experiment with new and innovative ideas, without having to face complex and long-drawn exit processes where their capital becomes interminably stuck in the event of business failure, the government provided benefits to startups ensuring ease in winding up of businesses.

    • As per the Insolvency and Bankruptcy Code, 2016, startups with simple debt structures, or those meeting certain income specified criteria* can be wound up within 90 days of filing an application for insolvency.
    • An insolvency professional shall be appointed for the Startup, who shall thereafter be in charge of the company (the promoters and management shall no longer run the company) including liquidation of its assets and paying its creditors within six months of such appointment.
    • Upon appointment of the insolvency professional, the liquidator shall be responsible for the swift closure of the business, sale of assets and repayment of creditors in accordance with the distribution waterfall set out in the IBC. This process will respect the concept of limited liability.

    EASIER PUBLIC PROCUREMENT NORMS: 

    Public procurement refers to the process by which governments and state-owned enterprises purchase goods and services from the private sector. Government organisations have significant spending power and can represent a huge market for startups. The objective is to make it easier for startups to participate in the public procurement process and allow them to access another potential market for their products.

    • Opportunity to list your product on Government e-Marketplace: Government e Marketplace (GeM) is an online procurement platform and the largest marketplace for Government Departments to procure products and services. DPIIT Recognized Startups can register on GeM as sellers and sell their products and services directly to Government entities. This is a great opportunity for startups to work on trial orders with the Government.
    • Exemption from Prior Experience/Turnover: In order to promote startups, the Government shall exempt Startups in the manufacturing sector from the criteria of “prior experience/ turnover” without any compromise on the stated quality standards or technical parameters. The Startups will also have to demonstrate requisite capability to execute the project as per the requirements and should have their own manufacturing facility in India. Click here to refer to the notification
    • EMD Exemption: DPIIT recognised startups have been exempted from submitting Earnest Money Deposit (EMD) or bid security while filling government tenders. Click here to refer to the notification.

    EASE IN SECURING INVESTMENT: 

    Getting recognition as a start-up under the Startup India Scheme is highly beneficial when it comes to securing investments. Recognition by DPIIT and the host of benefits that come along with it provide the investors with a sense of security in regards to their investment and success of the business they are investing in.

    Registering your business under the Government’s Startup India Scheme can provide entrepreneurs with a host of benefits inter alia subsidies, tax exemption, legal relaxation, financial & networking opportunities, fast track services etc. This is done so that entrepreneurs can focus on building businesses rather than being caught up on regulatory, legal and administrative compliances. Basically, Startup India Scheme aims to foster environment which is conducive to startup growth in the country.

    FREQUENTLY ASKED QUESTIONS (FAQs) FOR STARTUP INDIA

    1. Am I eligible to apply for DPIIT recognition?

    Start-ups that meet the eligibility criteria specified by DPIIT, such as being incorporated as a private limited company, registered partnership firm or a limited liability partnership firm; having annual turnover less than 100 crore; being established less than 10 years ago etc., are eligible to apply for DPIIT recognition. For more details refer to our article.

    1. Can I save my progress and return to the form later?

    Yes, you can save your form draft and return to form later.

    1. How long does it typically take to receive DPIIT recognition after submitting the form?

    The certificate of recognition can be issued within 2 working days, usually, once the application is submitted successfully with the required documents.

    1. Am I eligible to apply for DPIIT recognition?

    Startups incorporated as a private limited company, registered partnership firm, or LLP, and meeting specific revenue and innovation thresholds as defined by DPIIT, are eligible. More details have been provided in the article above.

    1. Can I save my progress and return to the form later?

    Yes, you can save your form as a draft and return to complete it later.

    1. How long does it typically take to receive DPIIT recognition after submitting the form?

    The certificate of recognition is usually issued within 2 working days once the application is successfully submitted with the required documents.

    1. Does DPIIT recognition provide any tax benefits to my startup?

    DPIIT recognition provides access to various benefits, including tax exemptions, patent filing assistance, and easier access to funding.

    1. Can I make changes to my application after submission?

    No changes can be made once the application is submitted. It is advised to review the form thoroughly before submission.

    1. Will my startup receive any physical certificate or acknowledgment upon obtaining DPIIT recognition?

    The Certificate of Recognition is issued digitally and can be accessed from the NSWS portal.

    1. Is there any fee associated with the DPIIT recognition process?

    There is no fee charged by the Ministry of Commerce and Industry for the DPIIT Certificate of Recognition for startups.

    1. What happens if my application for DPIIT recognition is rejected?

    Rejected applications cannot be edited. A new application can be submitted after three months from the date of the rejection email.

    1. What information and documents do I need to provide while filling out the form?

    You will need to upload the incorporation/registration certificate and explain how your startup is working towards innovation, development, or improvement of products, processes, services, or its scalability in terms of employment generation or wealth creation.

    1. What is the validity period of DPIIT recognition?

    The recognition is valid until 10 years from the date of incorporation.

    To read more about Startup India Registration: https://legalguruindia.com/startup-india-registration/

    Link to DIIPT’s website: https://www.startupindia.gov.in/content/sih/en/startup-scheme.html