In most businesses, people cost is a major element in the cost structure. In manufacturing and trading, this can range between 5-20% whereas, in software and services businesses, this varies from 60-80%. So it’s quite clear that, for the business to be really profitable, people cost has to be closely looked at. Failing to do so could endanger the survival of the business.
But here’s a good news! You can also save taxes as you hire people!
Corporate Tax provision
Do you know that there is an income tax provision that can cut down the tax expenses by almost 25-30% ?
This has been made effective from the financial year 2016-2017. This will translate into the following:
- Less Payout of Corporate Income Tax
- Profit after taxes increase
- Shareholders Value increase
To avail the benefit of this provision, you need to check the following
- If you have just started the business, then you can claim this benefit for all new employees for the first financial year.
- If you have been running the business for some years, then the provision is applicable to the increase in the number of employees, compared to previous year.For example: if the number of employees in financial year 2015-2016 was 25 and in the next financial year(2016-17), it increases to 30, then the benefit will be available for 5 employees.
- The employee should have worked for at least 240 days in a year.
- The salary per month should not exceed Rs.25000 per month.
- The employee is covered under PF program.
- The business of the company should fall under Tax-Audit under Income Tax Act.
So let us understand this benefit with an example
A company, ABCD, had 50 employees in financial year 2015-2016 and in the financial year 2016-2017, the number of employees increased to 65. All employees of the company were enrolled for Provident Fund and the company’s turnover exceeded Rs.25 million in financial year 2016-17.
Assume that the cost of the additional 15 employees, for the financial year 2016-17, was around Rs.4 million; and these employees had all worked for over 240 days in the year. The company can then take benefit of the provision.
The company, in financial year 2016-2017, will get tax relief on Rs.1.2 million (30% of Rs.4 million). This tax relief on Rs.1.2 million will continue until FY 2018-2019. So in total, the company will get a tax benefit on Rs.3.6 million of expenditure.
If the business falls under 30% tax bracket, the total tax saving will be around Rs.0.36 million (30% of 1.2 million) each year and for three years it will be Rs.1.08 million.
So if you are a growing business, add employees when needed and avail of tax savings!
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