Importance of optimizing income tax and loan goals

business loan and income tax

Income tax return filing is one of the top priority for every business intending for proper compliance. The importance of income tax filing is well known by business man who wish to expand business with bank financing. The best practice for income tax filing is not tax saving alone but also making best  suitable for bank loan.

Optimizing Income tax return filing with financing goals

Income tax return is considered as one of the primary document for business loan application, it serves as the proof of income earned by the business. Better net income results in better loan appraisal and credibility, optimize tax saving goal with financing goal by using better provision that will enhance loan appraisal and loan eligibility. Income tax act had given relaxation to small business to file income tax return under presumptive income scheme so in this case a business owner who aims only to save tax will declare only 8% or 6% under presumptive taxation scheme u/s 44AD. Consider a situation of good business earning actual net profit of 15 % and declaring only 8% as net profit as per 44AD will lack credibility due to low net total income.

Example :

Year 1 : 

Turnover : Rs.50,00,000.

Net profit as per Section 44AD – 50,00,000 X 8 % – 4,00,000.
Actual Net profit  @ 15 %                        – 7,50,000.

Year 2 : 

Turnover : Rs.6,00,000.

Net profit as per Section 44AD – ,00,000 X 8 % – 4,80,000.
Actual Net profit  @15%                          – 9,00,000.

Year 2 : 

Turnover : Rs.75,00,000.

Net profit as per Section 44AD – 50,00,000 X 8 % – 6,00,000.
Actual Net profit   @ 15%                       – 11,25,000.

While calculation loan eligibility banks generally calculate average income for last three financial year as below

Average income as per option 1 (with using maximum benefit under 44AD )= (4,00,000 + 4,80,000 + 6,00,000 ) / 3 = Rs.4,93,333.

Average income as per option 2 (with actual income )= (7,50,000 + 9,00,000 + 11,25,000 ) / 3 = Rs.9,25,000.

So comparatively you can see the difference in two options, suppose a bank policy is to provide loan up EMI payable capacity of 40 % of average total income then under option 1 maximum emi payable capacity will be Rs.197333 per annum (Rs.4,93,333  X 40 %) , where as under option 2 it will be Rs.370000 per annum  (Rs.9,25,000 X 40 % ).

What is the solution to solve this ?

As a business man you should have better knowledge about you business so it is your responsibility to decide whether there will be any requirement for business loan in next three year, if you consider loan is priority for business development then choose declaration of  maximum income under option 2 so that your eligibility of loan amount will be considerable higher compared to option 1. Be prepared to pay enhanced taxes at the end of financial year else you can deposit tax regularly each month to avoid cash flow crunch at the end of year and it will also give boost to declare high income.

Concept of higher interest in link to average Income

As we discussed above regarding eligibility percentage of 40% of some bank there will also be banks which provide 60 % of average income at higher interest rate. This is the main trap of bank and most business man fail to analyze this fact, business man with option will go for bank providing 60 % loan with higher interest rate, and business man with option 2 will go for 40 % eligibility and pay lesser interest for same loan amount for same number of years. If we fail to pay more taxes then we will end up paying more than double the tax saved in form of higher interest.

Chain process of business growth

Right business will develop its business with line of credit facilities and develop its business over years rapidly and it will also have improved cashflow because of reduced EMI. Business which is focused only of tax saving end up paying major portion of profits towards higher interests and again paying low taxes and rapidly avails loans with higher interest rates. So we can conclude this section by saying focus on long-term growth goals by availing low interest rates.

Wide choice of financial institutions for peace of mind

If you have solid financials most banks will welcome you with red carpet for loans with reduced interests, nationalized banks which is having conservative approval policies will provide loans for good financials. If you are getting loan from nationalized banks it will be very beneficial in terms of other charges and emi collection process. loan from Nationalized banks will give peach of mind in time of cash crunch because they wont pressure you much compared to private banks in case you fail to pay even one EMI.




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