Scaling a business in India means dealing with taxes at every turn. GST, income tax, TDS, and the list goes on. But here’s something important business owners miss, that is ways to save tax.
The main problem is many SME business owners don’t know about these deductions and even they find it too complicated. Eventually, they pay more tax than necessary, year after year.
In this KOFFi Break, this guide shows you 6 powerful tax-saving deductions that can help you reinvest your real money into your business. All of these are 100% legitimate provisions in the Income Tax Act.
Deduction #1: Hiring Incentive (Section 80JJAA)
Hiring new employees isn’t just good for your business growth, it can also reduce your tax bill significantly.
Section 80JJAA rewards businesses that create jobs for Indian workers. As per Section 80JJAA, if you hire new employees, you can claim 30% of their salary as an additional deduction for 3 consecutive years.
Example:
Suppose you hire 5 new employees at an average salary of ₹4 lakh per year. Your total salary expense is ₹20 lakh. Under Section 80JJAA, you can claim an additional deduction of ₹6 lakh (30% of ₹20 lakh) for 3 years.
Key conditions to remember:
New employees must work for at least 240 days in the year (or 150 days for the apparel industry).
Employers need to maintain detailed records with PAN, Aadhaar, and salary details.
Employees shouldn’t have worked anywhere else before joining your company (with some exceptions).
Employers must deposit EPF contributions regularly for all eligible employees.
Deduction #2: Research & Innovation Expenses (Section 35)
Innovation & research drives business growth, and the tax system recognizes this by offering generous deductions for research and development expenses.
Section 35 allows you to claim deductions for money spent on scientific research, product development, or innovation activities related to your business.
Many manufacturing businesses spend money on improving their products but never claim this deduction. They simply don’t realize that their product development activities qualify as research under tax laws.
Type of research expenses you can claim:
Salaries paid to research staff and scientists
Cost of materials, equipment, and testing facilities used for R&D
Payments made to approved research institutions or universities
Expenses for developing new products, processes, or technologies
Deduction benefit:
For in-house research, you can claim 100% of the expenses as a deduction. If you make payments to approved research institutions, you can claim 150% to 200% weighted deduction in some cases.
Keep in Mind:
Document your research activities properly
Maintain separate accounts for R&D expenses
Get approval from the Department of Scientific and Industrial Research (DSIR) if you want to claim higher weighted deductions.
Deduction #3: Employee Welfare & Training (Section 37 read with Rule 6E)
Investing in your employee’s growth and wellbeing isn’t just good management, it’s also tax-smart.
The Income Tax Act allows you to claim deductions for various employee welfare and training expenses under Section 37(1) as legitimate business expenses.
Expenses you can claim:
Training programs and skill development courses for employees
Health insurance premiums paid for staff members
Employee welfare activities like team outings, wellness programs, or sports facilities. Safety equipment and health checkups for workers.
Keep in Mind:
Create a structured employee welfare policy in your company to show the tax department that these expenses serve genuine business purposes
Make sure you maintain proper documentation
Keep invoices, attendance records for training sessions, and written policies explaining your employee welfare programs
Deduction #4: Interest on Business Loans (Section 36(1)(iii))
Most businesses take loans for working capital, equipment purchase, or expansion. The interest you pay on these loans can significantly reduce your tax burden.
Section 36(1)(iii) allows you to claim the entire interest amount paid on business loans as a deduction from your taxable income.
Example:
Let’s say you took a business loan of ₹50 lakh at 12% interest. In the first year, you pay approximately ₹6 lakh as interest. This entire ₹6 lakh can be claimed as a deduction, directly reducing your taxable profit.
Loans that qualify deductions:
Term loans taken for purchasing machinery, equipment, or property for business use
Working capital loans used for day-to-day business operations
Overdraft facilities used for managing cash flow
Loans taken for business expansion or starting new projects
Keep in Mind:
You can only claim interest as a deduction, not the principal amount. The principal repayment doesn’t reduce your taxable income, but the interest portion does.
Deduction #5: Preliminary Expenses (Section 35D)
Starting a business or expanding into new ventures involves significant upfront costs. Section 35D helps you recover these expenses through tax deductions.
Preliminary expenses are costs you incur before your business actually starts operations. These expenses can be claimed as deductions over a period of five years.
Preliminary expenses you can claim:
Feasibility studies and market research costs
Legal fees for company registration and documentation
Professional fees paid to consultants, CAs, or lawyers during setup
Expenses for preparing project reports and business plans
How the deduction works:
You can claim 20% of these expenses as a deduction each year for five consecutive years. This spreads out the tax benefit over time.
Example:
If you spent ₹5 lakh on preliminary expenses before launching a new business unit, you can claim ₹1 lakh as a deduction each year for five years.
Deduction #6: Salary Structure Optimization (Section 37(1))
The way you structure your salary payments can make a big difference to your tax liability. Smart salary structuring benefits both your business and your employees.
Under Section 37(1), all reasonable salary payments are fully deductible business expenses. The key is structuring these payments in tax-efficient ways.
Tax-smart salary components:
House Rent Allowance (HRA) instead of higher basic salary
Leave Travel Allowance (LTA) for employee travel benefits
Meal vouchers or food coupons (exempt up to ₹50 per meal)
Telephone and internet reimbursements for work purposes
Why this matters: When you pay a higher basic salary, both you and your employee pay more tax. But when you structure salary using allowances and perquisites, employees get tax exemptions while you still claim the full deduction.
Example:
Instead of paying an employee ₹50,000 as basic salary, you could structure it as ₹35,000 basic + ₹10,000 HRA + ₹5,000 special allowance. Your total expense remains ₹50,000 (fully deductible), but your employee’s taxable income reduces due to HRA exemption.
Pro-Tip:
Structured salaries improve employee satisfaction without increasing your costs. Employees take home more money, and you still claim full deductions.
Other Structure-Based Deductions
Beyond the major deductions, several smaller but valuable deductions exist based on how you structure your business operations.
1) Director’s Remuneration (Section 37 + 40(b) for LLPs)
Payments made to directors or partners are fully deductible business expenses. This includes salaries, commissions, bonuses, or professional fees paid for their services.
The company can deduct these payments while calculating taxable income. For LLPs, partner remuneration is specifically allowed under Section 40(b).
Make sure you document these payments properly with board resolutions, partnership deeds, and regular payment records. The amounts should be reasonable compared to industry standards.
2) Claim Home Office Rent (Section 37 + 194I)
Many business owners work from home but never claim rent as a business expense. If you use part of your home exclusively for business, your company can pay rent to you as a director or partner.
The rent paid becomes a deductible business expense. You need to show a proper rental agreement, make payments through bank transfer, and deduct TDS under Section 194I if applicable.
Calculate the rent proportionately based on the space used for business. If your business uses 30% of your home, claim rent for that portion only. This makes your claim defensible during tax assessments.
3) Pay Professional Fees Instead of Salary
For consultants, part-time specialists, or freelancers working with your business, consider engaging them as professionals rather than employees.
Professional fees paid are fully deductible under Section 37(1). This arrangement works when the person genuinely provides professional services rather than regular employment.
Benefits of this structure:
No PF or ESI obligations for your company. Simpler compliance requirements. The professional manages their own tax planning. You issue Form 16A instead of Form 16.
Keep in Mind:
This structure only works for genuine professional relationships
Don’t try converting regular employees into consultants just for tax benefits
The tax department can reclassify the relationship and deny deductions
Use professional engagement for genuine consultants, advisors, and specialists who work on specific projects or provide expert advice.
Final Thoughts
Many business owners end up paying more taxes because they don’t know about these deductions. It’s about understanding the tax deductions and using those government provisions smartly.
To save tax in your business, start with 3 simple actions today:
Check & audit your current expenses
Identify which deductions you’re already eligible for but never claimed it
Collect every bill, invoice, receipts, agreements, and payment records
Consult & hire a qualified CA who understands SME taxation
Remember, you can reinvest every penny that you saved in taxes to grow your business. Use these deductions wisely, collect documents, and watch your tax liability reduce significantly over time. Don’t leave money on the table simply because you didn’t know these options existed.
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