The major difference between Employees and Business in Taxation is:-
🔸Employee Earns Income 🔸Pays Taxes on It and 🔸Spend Remaining to meet their Expenses
Whereas,
🔹Business Earns Income 🔹Deduct all the Expenses 🔹Then pays Tax on the Remaining Part
Therefore, the Tax liability of the business Reduces significantly.
For Eg:-
Case1 :- Salary Not given to his Son
- Prakash Runs a Business whose Annual Income is 10 Lakhs - His Taxable Income would be(Profit) 10Lakhs - Here Income Tax payable would be ₹1,12,500
Case2:- Salary Given to his Son
- Prakash Runs a Business whose Annual Income is 10 Lakhs - He gives ₹2,40,000 salary to his Son - His new Taxable Income would be (Profit) 7,60,000 i.e (10,00,000 - 2,40,000) - Here Income Tax payabe would be ₹64,500
And the Income Received by his son i.e 2,40,000 would be Tax free as it comes under 0% Tax bracket.
Legal Provisions:-
• Salary paid to Son can be claimed as business expenditure by the sole propreitor, subject to disallowance u/s 40A of the Act
• Cash gifts received from a child are exempt from tax and income earned from such investment will not be clubbed to your income for taxation.
• The relationship of father and son is covered under the definition of “specified relatives". So a father can give any amount of gift to his son without any tax implications for both. Please note that as per the present provisions of tax laws in case a person accepts any gift beyond Rs. two lakhs in cash, he may become liable to a penalty equal to the amount of gift accepted in cash. So avoid accepting gifts beyond two lakhs in cash.
