Income tax is a significant liability and harsh reality for many partnership firms, especially in developing modes. The tax burden can cause a considerable amount to pay before the timeline provided by the income tax department itself. However, every business and individual has to pay tax on time. But still, it is good to save a significant amount by claiming deductions and exemptions. Here in this blog, I will share some crucial tips to save tax in a partnership firm. So, if you are also running a partnership firm and willing to know how to save tax in a partnership firm, then read this post carefully.
How to Save Tax in Partnership Firm in India?
1. Invest in Marketing Your Business
Many businesses are still depending upon the traditional form of marketing. But if you want to reach out to more potential customers, then you need to use a digital form of marketing. Because there are millions of potential customers waiting to try your products. Invest some money in e-marketing or marketing. It can be helpful for you in minimizing tax liability. In simple words, the marketing expenses can be claimed as a deduction; therefore, it is good to use this provision and save a good amount of tax.
2. Traveling and Accommodation Expenses
It is a usual activity because most of the time, partners of the business need to travel from one place to another. This traveling activity can be more if their partnership firm has several branches across cities and states. So, if you need to save tax, then from the next time you travel, book a ticket, or stay in any hotel, then use your company’s funds rather than from your account. It is considered a business expense; therefore, you can claim a deduction from the partnership firm’s taxable earnings.
3. Charge TDS or Tax Deducted at Source
You can see some specific clauses in the income tax act under which the partners or the business owners can deduct TDS or Tax Deducted at Source on the payments. In simple terms, you can charge TDS while making payments of rent, commission, and other expenses you need to meet because it will help you to reduce the tax burden. If you do not charge TDS, it will create an additional burden to your firm’s tax liabilities.
4. Save Tax by Donation
It would be good if you also made some donations because donations made to charitable institutes and special funds are eligible to be claimed for deduction. You can see this provision under section 80G; however, if you made cash donations, you can only claim Rs2000. So, if you take advantage of this section, you should use another mode other than cash. Using bank transactions or digital payments for donations, you can claim the whole amount for deduction under 80G.
Depreciation is also a meaningful way to reduce tax liabilities, especially if you are a manufacturing partnership firm. Companies can claim additional depreciation of up to 20% while installing new machinery. According to section 35 AD, manufacturing companies installing new equipment or machinery can have the option to utilize additional depreciation. So, if you have already claimed standard depreciation of 15% and want to reduce the taxable amount. In that case, you can use this 20% additional depreciation. If you do not use this section, you will pay a higher tax amount, which could be reduced or optimized.
6. Uses Digital Transactions
As the digital era is growing up and making things easier, you use the traditional way of making payments for your employees. It would be best if you prevented doing this because it can increase tax liabilities. If you make payments of over Rs20,000 to a single person in a single day, then you can come in the red eye of the Income Tax Department. Also, it will have a negative impact on your tax burden as you will have to pay more tax.
Therefore, you should use digital modes of payment such as bank transfers while making salary and other expenses payments. It will keep a sustainable record of every transaction. For example, you need to pay a salary to your employee called A of more than Rs20,000 and make this payment in cash. In that case, the income tax department will consider this transaction null, and you will not be able to use it as business expenses.
7. Give Donation to Political Party
You can also use 80GGC, which allows you to donate to political parties. These transactions qualify for a 10% deduction with no upper limit. The good thing about this section is that you need not meet any upper limit, which gives you the flexibility to decide the donation amount to minimize the tax amount. But you need to make sure the payment must be made in any mode except cash and should also retain a receipt of the payment. Many businesses use this technique to reduce their tax burden, and it can also reduce your partnership firm’s tax liability.
8. Distribute Profit to Partners
If you are working as a partner in a partnership firm. Then you should know if your partnership firm generates a profit and has decided to distribute that profit amount. You will not have any tax liabilities on the profit you shared. Here partners get tax benefits because their partnership firm has already paid the tax amount on generated profit. So, if your business is also running profitably, then you can use this provision as well.
9. Get Deduction On Housing Loan
Most of the partners avoid housing loan facilities because they believe purchasing a house is not beneficial on loan. But you must consider it can be a long-term ass, and you can claim up to Rs1,50,000 every year on the loan amount. Here section 80C implements and allows partners to use this deduction facility from their taxable income. However, it is essential to link the PAN number with the company to claim this benefit.
I hope you have understood some of the crucial ways to save tax in a partnership firm. And now you have understood how you can use these tax-saving provisions for your partnership firm. These days every business or entrepreneur should use these provisions to pay an effective and efficient tax amount to the government. So, start planning your tax-saving strategy to save a significant portion of tax liability.