- 19-Apr-2025
- Healthcare and Medical Malpractice
Small businesses and startups in India can take advantage of various tax deductions under the Income Tax Act, 1961. These deductions reduce the taxable income of the business, helping them lower their tax liability. The available deductions apply to both operating costs and capital investments, making them useful for startups looking to save on taxes as they grow. By utilizing the correct deductions, businesses can reduce the tax burden and reinvest the savings into their operations.
Section 80C allows deductions for certain investments made by businesses. Although this section is typically used by individuals, small business owners and startup founders can benefit if they make investments in tax-saving instruments like:
The maximum deduction available under Section 80C is ₹1.5 lakh per financial year.
Startups and small businesses can claim deductions under Section 80G for donations made to charitable institutions or registered non-profit organizations. The deduction amount can range from 50% to 100%, depending on the organization to which the donation is made.
Eligible Donations: Contributions to organizations like the Prime Minister’s National Relief Fund or charitable trusts approved by the government qualify for these deductions.
Small businesses and startups can claim capital expenditure deductions for setting up new businesses or expanding existing businesses under Section 35AD.
This section provides a 100% deduction on the cost of setting up a new business or plant and machinery, excluding land and buildings.
Applicable to: Manufacturing, processing, or production businesses that incur capital expenses.
Businesses involved in research and development activities can claim a deduction under Section 35. 100% deduction is available for in-house R&D for scientific research related to business.
Example: A startup engaged in technology development or pharmaceutical research can claim deductions for the costs incurred in R&D.
Section 80-IAC offers tax exemptions for eligible startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT).
If the startup meets the criteria for a recognized startup under the Startup India scheme, it is entitled to a 100% tax deduction on its profits for three consecutive years out of the first seven years of operation.
This deduction applies to businesses involved in innovative activities and with a turnover of less than ₹100 crore.
Small businesses and startups can claim depreciation on their business assets (e.g., machinery, vehicles, office equipment) under Section 32 of the Income Tax Act. Depreciation reduces the taxable income by allowing businesses to deduct a percentage of the asset’s cost over its useful life.
The depreciation rate depends on the nature of the asset, and businesses can claim either straight-line depreciation (SLM) or written-down value (WDV).
Example: If a small business purchases a machine for ₹5 lakh, it can claim depreciation based on the applicable rates under the Income Tax Act (usually 15%-40% depending on the asset type).
If a small business or startup provides education loans to employees or their families, the interest on such loans is eligible for a deduction under Section 80E.
While primarily applicable for individuals, business owners who have taken loans for further education related to their business may also benefit from this deduction.
If a startup or small business is engaged in export activities, it can claim tax exemptions under Section 10A for its export earnings.
This section provides a 100% exemption on profits earned from exporting goods or services to foreign markets for a period of 10 consecutive years.
Businesses operating in Special Economic Zones (SEZs) are entitled to tax exemptions under Section 10AA. These businesses can enjoy 100% tax exemptions on their profits for the first five years of operation and 50% tax exemptions for the next five years.
The SEZ scheme aims to promote the export sector, and businesses operating within SEZs are encouraged with various tax benefits.
The Presumptive Taxation Scheme under Section 44AD provides small businesses with an easier tax filing process. This scheme allows businesses with a turnover of up to ₹2 crore to declare 50% of their turnover as income, without maintaining detailed books of accounts.
This deduction simplifies the filing process and is available for small traders, manufacturers, and service providers.
Small businesses can claim deductions on the interest paid on business loans under Section 36(1)(iii). This deduction is allowed on both short-term and long-term business loans.
If a startup borrows money for business expansion or operations, the interest payments on the loan are deductible from taxable income.
Section 80JJA provides deductions for businesses hiring new employees. Small businesses that employ individuals who are not engaged in business before can avail of a deduction for 100% of the wages paid to these employees for the first three years of their employment.
This deduction encourages businesses to hire and train new employees, benefiting the workforce and promoting employment.
Scenario: A small software development startup has the following details:
The business can claim these deductions to reduce its taxable income, thereby lowering its tax liability.
Small businesses and startups in India can benefit from various tax deductions under the Income Tax Act. By strategically utilizing these deductions, businesses can reduce their taxable income and save on taxes. Whether through depreciation on assets, capital investment incentives, or specific startup exemptions, understanding and applying these deductions can play a crucial role in effective tax planning for small businesses and startups.
Answer By Law4u Team
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