Are you a self-employed woman? These pointers only can help you save money and redirect more funds to your retirement pool.

Self-employed? Consider these 5 ways to cushion your post-retirement life

We understand you have worked hard to achieve the freedom and autonomy a self-employed enterprise provides to do things on your own terms. It also has the potential to establish a business that adds value to all its stakeholders – employees, customers, investors, the community, and of course you. 

As a businesswoman, this initiative can bring financial rewards for your labour but it also makes creating a retirement savings plan more challenging. As an entrepreneur, you don’t have a fixed source of income, and retirement planning might not be on your list of priorities. 

In addition to considering sources of post-retirement income, you also need to think about tax implications and succession planning for your business. Consider these five ways to cushion your post-retirement lifestyle:

1. Drawing a salary

Many entrepreneurs, especially those in fledgling businesses, do not draw a fixed salary. They undercut personal expenses to keep liquidity for their business. However, this is not a sound practice. Drawing a salary helps keep business and personal expenses separate for accounting and tax purposes, while additional funds can be used to make personal investments.

2. Tax planning

If your business is registered as a partnership firm or private limited company, you can save money on various fronts. For instance, under section 40(B)(V), your business can claim deductions on the salary paid to all employees including yourself.

Similarly, new business can claim ‘preliminary expenses’ as deductibles from the taxable income under Section 35D of the Indian IT Act. However, these expenses have to be equally deducted over a five-year period.

Account for all expenses on utilities, rentals, etc. to reduce your tax burden. Claiming depreciation on all capital and operational assets bought in the company’s name can help you reduce your tax liability.

3. Income sprinkling

Income sprinkling or income splitting is a method by which business owners can divert some of the business income to family members while saving on tax liability. 

This can be done in two ways. You can allocate some stake of your business to family members and pay them private company dividends, which are exempt from tax under section 10(34) of the Indian IT Act, subject to the dividend value being less than Rs 10 lakh.

Alternatively, you can hire family members as employees and pay them a salary below the exemption limit (Rs 2.5 lakh under the current slab) or within the basic slab (5% for income between Rs 2.5 lakh and Rs 5 lakh). While the family member gets an exemption or pays the bare minimum tax on the income, the business accounts this as an expense and reduces its taxable income.

4. Pension plan

Based on the incorporation of your business, you can start an employer-funded pension plan. As an employer, your contributions are tax-deductible for corporate tax purposes and as an employee you are not liable to pay tax on the amount till you claim the pension.

As a self-employed woman, you can claim a deduction of 20% (or Rs 1.5 lakh, whichever is lower) from your total income under section 80CCD.

5. Ownership transition

If you don’t have a succession plan in place, selling your business to someone who will care for it just as you did will not only give you mental satisfaction but also a size able payout. Get the value of your business assets, potential future earnings, and goodwill appraised by professionals to get the best deal.

If you have any patents, trademarks, or goodwill attached directly to your name, you can earn trail income from it even when you are not actively involved with the business.

Allocating these funds and judiciously spending them is a different ballgame altogether. However, this is a good way to start. As the saying goes, a penny saved is a penny earned.

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