How to Maximize your One Person Company Savings before Filing Income Tax?
A one-person company (OPC) is a hybrid entity that combines the advantages of a private limited company with a sole proprietorship to offer the best of both worlds.
OPC enters into a binding agreement with its shareholders or directors. This means that you can get paid as a director, lessor, or creditor and lend money to your own business while still earning interest. Rent, interest, and director compensation are all deductible expenses that lower the company’s profitability and, as a result, your company’s taxable income.
In light of the aforementioned, we go over potential strategies in this blog post for maximizing an one person company savings before submitting an income tax return (ITR).
Understanding OPC income tax filing
Any OPC registered in India is required to file an ITR under Section 139(1) of the Income Tax Act, 1961. As a result, an one person company registration is required by the Income Tax Act of 1961 to maintain conformity. OPC directors are in charge of filing their taxes annually.
Income tax slabs for an OPC
|Net Income Slab (Gross Taxable Income–deductions)
|Income Tax Rate
|Health & Education Cess
|Rebate u/s 87A (FY 2019–20)
|Upto 1 crore
|Above 1 crore but upto 10 crore
|Above 10 crore
OPC taxable revenue
Unfortunately, there isn’t a single tax benefit that an OPC has over other forms. The tax rate is a flat 30%, and other tax laws, including the dividend distribution tax (DDT) and minimum alternate tax (MAT), are applied as they are for any other type of corporation.
How to save the most taxes as an OPC
Paying salaries to the company’s directors is the simplest approach to saving on taxes. As the company’s founder, you have the option of paying yourself a salary rather than splitting the profits as dividends. The allowed expense for a private limited corporation is salary.
However, we go over additional strategies for optimizing savings for an OPC before filing an ITR in the sections that follow.
One of the most well-known and favored sections among taxpayers is Section 80C because it enables individuals to lower their income tax by making tax-saving investments or incurring qualifying costs. It permits a maximum annual deduction of Rs 1.5 lakh from the taxpayer’s gross income.
Hindu undivided families (HUFs) and individuals can both benefit from this deduction.
Under Section 80D, you (as an individual or HUF) are eligible for a deduction of Rs. 25,000 for insurance coverage for yourself, your spouse, and your dependent children. If your parents are younger than 60, you may also deduct an additional Rs. 25,000 for their insurance. The deduction amount for parents who are older than 60 is now Rs. 50,000 (up from Rs. 30,000 in the 2018 Budget).
If the taxpayer and their parent(s) are both 60 years of age or older, the maximum deduction allowed by this provision is Rs. 1 lakh.
The various donations listed in Section 80G may be deducted up to 100% or 50%, with or without limitations.
Above Rs. 2,000 in monetary gifts will no longer be eligible for a tax deduction starting in the 2017–18 fiscal year. Any method other than cash should be used to make donations over Rs. 2,000 in order to qualify for an 80G deduction.
Public provident fund
Because it combines tax benefits, returns, and safety, the public provident fund (PPF) scheme is a particularly well-liked long-term savings plan in India. The National Savings Institute of the Finance Ministry introduced the PPF program in 1968. The PPF program offers a competitive interest rate, and there is no tax withholding required on the interest-rate-related returns.
Tax benefits you get when you invest in PPF
- PPF falls into the exempt-exempt-exempt (EEE) group of investments
- This implies that the PPF contributions you make will be tax deductible (Section 80C of the Income Tax Act).
- When you withdraw the money, both the amount you have accumulated and the interest are tax-free.
- You should be aware that a PPF account cannot be closed before maturity.
Hence, all contributions made to a PPF account are tax-exempt under Section 80C of the Income Tax Act. When a person withdraws money from their PPF account, both the amount they have saved and the interest they have accrued are tax-free.
National pension scheme
The national pension system (NPS) is a long-term, voluntary investment plan for retirement that is under the control of the central government and the Pension Fund Regulation and Development Authority (PFRDA).
The program has tax advantages under Sections 80C and 80CCD and is transferable between jobs and locales.
Tax efficiency – NPS tax benefit
For NPS, you may deduct both your contribution and the employer’s contribution up to a total of Rs. 1.5 lakh. The self-contribution, which is a component of Section 80C, is covered by Section 80CCD(1).
The maximum deduction one can claim under 80CCD(1) is 10% of the pay, but no more than the specified amount. This cap is 20% of the taxpayer’s gross income if they are self-employed.
The employer’s NPS payment is covered by Section 80CCD(2) and is not included in Section 80C. Those who are self-employed taxpayers are not eligible for this benefit.
The lowest of the following will serve as the maximum amount allowable for deduction:
- The employer’s actual NPS contribution
- 10% of basic + Dearness Allowance
- Total gross income
Any excess self-contribution (up to Rs. 50,000) may be claimed as an NPS tax benefit under Section 80CCD(1B). Hence, the program permits a total tax deduction of up to Rs. 2 lakh.
Equity-linked saving scheme
Under Section 80C of the Income Tax Act of 1961, an individual or HUF may deduct up to Rs. 1.5 lakh from total income by investing in an equity-linked savings scheme (ELSS). An investor’s tax burden would be reduced if they invested Rs. 50,000 in an ELSS because this sum would be subtracted from their total taxable income.
Enhanced post-tax returns
The long-term capital gains (LTCG) from ELSS mutual funds will only be taxed at 10% if your total capital gain in the financial year of withdrawal exceeds Rs. 1 lakh. You are exempt from paying long-term capital gains tax if your annual earnings are less than Rs. 1 lakh.
Tax consequences for ELSS
The income tax calculation treats capital gains from ELSS in the same manner as the other equity instruments. While LTCG are only taxable if they reach 1 lakh throughout the financial year, short-term capital gains (STCG) are taxed at a rate of 15%. A 10% tax is applied to LTCGs for amounts over Rs. 1 lakh.
Voluntary revision of financial statement or board’s report
According to Section 131 of the Companies Act of 2013, if the financial statement or board report appears to the company’s directors at any time to be in violation of the law or to have been prepared with an error or inaccurate information that needs to be corrected, the directors may apply to the relevant tribunal for permission to revise the statements. To save tax in this regard, the corporation may submit a revised statement no more than once throughout a fiscal year.
After receiving a tribunal order, the firm may file a revised statement with a copy of the order with the Registrar of Companies (ROC), as long as it is permitted to update the financial statements for any of the three prior fiscal years. The board’s report of the pertinent financial year in which the revision is being filed must include a full explanation of the reasons for the change.
Understanding expenses and income
According to the Companies Act of 2013, a company loses its status as an OPC and must compulsorily convert to either a private company or public company if its paid-up share capital exceeds the prescribed limit (currently Rs. 50 lakh) or its turnover exceeds Rs. 2 crore in three prior consecutive years.
Thus, it is crucial for an OPC company to comprehend its expenses and income in order to maintain its status as an OPC and avoid losing it.
An OPC’s primary drawback stems from a taxation standpoint. As was previously mentioned, the Income Tax Act of 1961 disregards the idea of an OPC and classifies it in the same tax category as a private corporation, which is 30% (plus surcharges) of gross income.
Why accurate record-keeping is critical?
It is imperative to keep accurate records for a number of reasons, including the following:
- Calculating taxable income: With the use of accurate records, which give a more full picture of the entity’s financial activities, individuals and businesses can more precisely determine their taxable income. This includes income from all sources as well as credits and deductions, both of which have the potential to reduce an individual’s or business’s overall tax burden.
- Supporting tax deductions and credits: When they keep reliable records, people and organizations are better prepared to support their claims for tax deductions and credits. The expenses that qualify for the in-question tax benefits are confirmed by these records. For instance, keeping track of business expenses and charitable contributions can help support claims for tax credits and deductions.
- Avoiding penalties and interest charges: When financial information is recorded incorrectly, the tax authorities have the right to impose fines and interest charges. By ensuring that they appropriately report their financial information, effective record-keeping aids people and organizations in avoiding any fines and charges.
- Facilitating audits: Keeping proper records could make it simpler for tax authorities to audit a company. Having records that are orderly and current can help individuals and businesses quickly provide the information sought by the tax authorities in the case of an audit. This may help shorten the audit’s timeframe and ease any associated stress.
For the purpose of filing your ITR, you should keep correct records by:
- Reconcile bank and credit card statements: By routinely comparing your bank and credit card statements with your records, you can ensure that all of your financial activities are accurately recorded and accounted for. This will help you spot and steer clear of bogus conduct.
- Keep records for the appropriate amount of time: The Internal Revenue Service (IRS) has a 3-year audit window and a 6-year assessment window for situations of material underreporting of income; hence, it is advisable to keep records for at least 7 years.
- Keep accurate records of capital gains and losses: It is crucial that you keep detailed records of any gains or losses relating to the funds in your investment portfolio if you have any assets. This information will be essential to figuring out how much tax you must pay.
Depreciation is a company expense that is tax deductible. By deducting the expense over the period of the asset’s useful life, it gives firms a mechanism to recoup the price of a qualified item. If a company doesn’t take asset depreciation into account, it might expect a significant impact on its profitability.
An one person company can determine how much an asset depreciates and thereby optimize it using any of the following methods provided under generally accepted accounting standards in order to account for a tax deduction:
- Falling balance: Under this method, the early years of an asset’s life are recorded as having higher depreciation costs, while the latter years have lower costs.
- Double-declining: When using this strategy, assets deteriorate twice as quickly as they would with the conventional declining balance method. Additionally, it takes into account that depreciation costs are higher in the early years of an asset’s life and lower in the later years.
- Sum-of-the-years’digits: This method adds the asset’s anticipated life to determine depreciation. After that, each year is divided by that sum, starting with the first year’s larger number.
- Units of production: Using this strategy allows businesses to deduct more money. This is thus because an asset’s worth is determined by how many units it creates, not by how long it has been in use.
- Straight-line method:The most often used approach for estimating depreciation is the straight-line method. The value is determined by dividing the total number of years a corporation anticipates using the asset by the difference between the asset’s cost and estimated salvage value.
The income tax laws make no specific allowances for an OPC. It receives the same tax breaks, pays taxes at the same rates, and complies with tax laws just like any other private corporation. In fact, by creating an OPC rather than operating a sole proprietorship, a person may end up paying far more taxes.
TDS compliance: At the moment, all enterprises and LLPs are required to TDS, regardless of their volume of sales. Everyone has a unique set of circumstances. When a person’s firm generates more than Rs. 1 crore in annual sales, they are only obligated to deduct TDS (gross receipts of Rs. 50 lakh in the case of a professional). But if someone makes an OPC, they must begin withholding TDS on the first day.
DDT: Paying dividends to shareholders is one of the most common ways for a company to distribute its revenues. Any Indian business that declares a dividend is required to pay a DDT of15% in addition to the normal income tax that the business must pay. An OPC is subject to a 25% tax. If someone wants to transfer the profit from their OPC, they effectively pay more than 40% tax (25 + 15% plus surcharge and cess).
As a result, the Act has to be changed so that both individuals and entities can profit from TDS compliance. This is expected to happen with DDT as well.
Additionally, this would shield the OPC from having its expenses disallowed in the case of non-deduction and payment of TDS up until the turnover limit is reached. Because TDS compliance would only be necessary if the OPC was the subject of a tax audit in accordance with Section 44AB of the Act, this will also help OPCs better grasp the law.
Filing income tax return online
The central government deducts income tax from each and every eligible taxpayer. The procedure of submitting an ITR in India enables the taxpayer to declare tax benefits, calculate their net tax obligations, and provide proof of their gross taxable income.
You can submit your ITR online through Kanakkupillai at www.kanakkupillai.com or the website of the income tax department.
With Kanakkupillai.com, filing an ITR is really easy. Within 7 minutes, you can electronically file your taxes!
Details necessary for e-filing your income tax return with Kanakkupillai.com
It is sufficient if you submit your ITR electronically by using just the information below and sending it to Kanakkupillai.com:
- Generate crucial information, such as a permanent account number (PAN), an Aadhar card, and your present location
- You must provide information about every bank account you’ve had within the specified fiscal year.
- Proof of income in the form of current pay information, income from businesses (such as fixed deposits and savings bank accounts), and so forth
- Details regarding all the deductions you are obligated to take under Section 80
- Information on tax installments, such as TDS and payments of advance taxes
Based on our conversation so far, we think that this blog could aid all those curious readers who seek to know how to optimize an OPC’s savings in terms of tax prior to submitting