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How can a private limited company save tax

Ishita Ramani 
on 10 January 2020

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This Article explains how to save tax in a private limited company. It explains various legally permissible ways in which you end up saving a lot of income tax.

How can a private limited company save tax

Company is an artificial person created by law. it is clothed with many rights, obligations, powers and duties prescribed by law.

What is a Private limited company:

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.

That is true that we can not and must not avoid tax payments, but yes certain tax planning steps can be taken with an objective of getting some extra monetary benefits.

Let us now discuss how to save tax in Private Limited company:

Salary to Director:

  • A director is a person who looks after the performance of the company and administers a particular part of the company
  • Easiest way of saving tax is to give salary to their directors.
  • As the founder of the company, instead of sharing the profit as dividend, you can share the profit as salary.
  • Salary is the allowable expense of the private limited company
  • Hence for example if a company is making a profit of rs. 4 lakh, company can pay salary to to directors, say 2 lakhs to each director.

Sitting fees to director:

 
  • A company may pay sitting fee to a director for attending meetings of board or committee thereof.
  • Such sums as may be decided by the BOD thereof which shall not exceed 1 Lakh per meeting of the board or a committee thereof.
  • That can be claimed as 'Expenditure' in the hands of company and is Exempt in the hands of individual under prescribed limit.
  • Any remuneration or fees or commission by whatever name called shall be liable to be deducted at the rate of 10%
  • That is to say that if a person attended board meeting for a company and the board decided per meeting fees Rs. 80000/- then the company shall pay Rs. 72000/- to the person and Rs. 8000/- as TDS.
 

Depreciation on assets:

  • When there is a purchase of an asset it would be categorized as capital assets in the balance sheet of the company
  • This way the purchase item will appear in the asset side of the Balance Sheet and not in the Profit & loss statement
  • If the assets bought is expected to generate revenue for the company for a longer period of time i.e. 180 days or more then there will be full depreciation on the assets would be counted
  • This ultimately will give tax benefits in over the years

Preliminary expenses:

  • Preliminary expenses are the expenses incurred for incorporation of a company
  • There are several expenses that are incurred before and after private limited company incorporation
  • These expenses are borne by the founder of a private limited company for its incorporation
  • Such expenses are professional charges paid for drafting of MOA and AOA Printing cost of documents, fees paid to ROC, Stamp duty etc
  • People can take advantages of such expenses bookkeeping it in the books of accounts

Rent expenses:

  • If the place shown as the registered address of the company is in the name of the director or in the name of any relative of the director then, in that case, it can easily be shown as an expense of the rent
  • All you have to do is to make a rent agreement in the name of the owner, start transferring the rent and book the rent expense in the company’s books

Salary expenditure of a family member:

  • When in the business there are family members involved, start bookkeeping their salary as an expense in the company’s books
  • This way you will be able to bring your profit at your home again

Entertainment expenses:

  • Then there is one most exciting expense of the business
  • Periodically you must celebrate the success of your business
  • And the expense of which can be used in saving tax of 30% just by bookkeeping the same in the books of account

Meeting expenses:

  • Meeting client over dinner, to a theatre show or to a sporting event such expenses are deductible.
  • Also for business purposes when you socialize and have a lot of meetings and visits to several places.
  • You can bookkeep all such expenses in a proper manner and reduce your tax.

Director’s vehicle expenses:

  • Normally in the business for travelling and meetings the director’s vehicle is used.
  • And the fuel use and also repair maintenance of such vehicle can be booked as an expense in the books of the company since the same expenditure is exclusive for business.

The above expenses can save 22% to 30% of tax of the companies. However, this needs proper documentation. If you plan in a proper way then you can take maximum benefits of it.


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