Introduction

Hello friends! When if you have searched for the topic of finance on the internet then you must have come across tax. You should have read that some of the rich people you know pay less tax than a common average middle-class man and not only that some of them pay zero percent tax legally. We are also going to know about taxation and how to reduce it legally.

The World Needs Businessman

The modern economy and business world that exists today are created by a businessman who solves an existing problem in the world with a more goal-oriented persistence with work than ever existed. Without the existing business that exists today, many people will be unemployed and the government will not get much tax revenue. Totally the economy of a country will vary and the country will not develop much and will go into decline.

As business helps the development of a country, So the government can create a system that allows these types of businesses to continue to grow. 

So you can enjoy tax benefits if you do business. A system where taxes can be paid especially after expenses is therefore a big advantage for businesses. So you can get more tax benefits if you do business. Why do people who do this type of business have this tax benefit than the average working person, that is, business is a money-making machine and when the machine grows continuously, it will give employment to many people and thus the country will progress, that is why they have this benefit.

Job vs Business

Let us elaborate on these with an example. Robert is a highly paid-employee. He earns approximately twenty lakhs per year. Calculate the tax for him at about 25 percent per year for the simplicity of calculation. If calculated in this way, he will pay about 5 lakhs (25%/Tax) in taxes per year. Out of the remaining 15 lakhs, he keeps 10 lakh rupees for expenses and saves the remaining 5 lakh rupees.

Next, there is a man named Wilson who also earns 20 lakhs per year but earns it through a small business. He earns this money by providing his service to other companies or by providing that service to his clients. Before calculating a tax for him, we need to calculate the business expenses first. For example, internet connection, office rent, and any new computer costs that may be required to provide that service can be taken into the book of accounts. Let us consider the remaining amount as 15 lakhs for him also. If he has bought any property or car for business purpose, that and EMI can be taken into the book of accounts. Next, we have to take into account the depreciation cost for this. 

Tax Calculations

Out of this 20 lakhs, if we calculate 5 lakhs for business needs, 1.3 lakhs for depreciation, and the remaining 1.3 lakhs for EMI, the balance will be 9 lakhs. If 15 percent tax is calculated on that nine lakhs, he will pay 1.35 lakhs tax per year. After all this, the remaining 7.65 lakhs can be used for his own expenses. But he doesn’t need much money as his excess expenses are related to his business. So let’s take only 3 lakhs for his own needs. Another thing we need to understand here is that the amount we calculate for depreciation expense is only for accounting purposes but we will not actually spend that much money so we will take it as well. So that amount will be added to his net profit (3 lakhs per year / (+depreciation)).

Savings Potential between Rob and Wil

Even though they both made the same amount of money, Wilson was able to reduce his taxes by accounting for his expenses. But Robert could not reduce his expenses.  Because he spent everything like his child’s school fees, house rent, etc from that 10 lakhs. If he buys a house or buys a bike or a car and pays EMI for it, that will also come as an extra expense for him. Let’s take the EMI calculation for him as only one lakh per annum, then he will have only 4 lakhs left. But after all the expenses of Robert, the remaining amount will be around 7.65 lakhs. If you see the difference between their savings it is almost double. Thus Wilson can build his wealth much faster than Robert. He can invest his savings in a safe investment or invest in some other business to further diversify his savings.

Conclusion

In this way, Wilson can increase his wealth even faster. This is why the rich pay a lot of money and gain a lot of knowledge from smart accountants and legal advisors to increase their wealth. This is also mentioned in Rich Dad Poor Dad’s book. If you are currently an employee working a 9 to 5 job and you are desperate to get out of it, start your business venture as soon as possible. If you want to know about the share market and mutual funds then share your opinion it in the comment and we will talk about it in the next blog.