If someone invests in my business for a return of 30% per year. Can this 30% payout be deducted from gross earnings and reduce tax liability for my business? Is there any other way I can payout this 30% return on investment and make it tax deductible?
One way is to show 30% as interest paid on the amount you had taken from someone.
From what I’ve learnt so far is that individuals cannot lend money at an interest. Only NBFCs, banks, licenced lenders can charge interest.
according to my knowledge , individual can lend and borrow money at interest, license is only required when its forms substantial or main part of your business . Do you think if your friend or relative gives you loan and charges interest or vice versa , there would be any issue. But Yeah everyone should check his own case in these matters.
That was my initial thought too. But after discussing with a lawyer he has firmly advised me against it. Hence I was now wondering if I could take this as a business investment and return 30% as profits. In this case, would I be able to adjust this somehow and make it tax deductible. The answer, I believe, is no; and hence was wondering if some specialists here have any suggestions.
If you are going to classify the amount initially received as an investment, then
You need to either form a partnership / incorporate an LLP / incorporate a company (you cannot be a sole proprietor, if any other person has ownership stake in your venture)
Amount distributed as profits by the entity cannot be claimed as a deduction from the income earned during the year by the entity. But depending on the entity’s structure, the distributed profits need not be subject to tax again, in the hands of the owners/investors.
If you are going to classify the amount initially received as a loan, then
You may first need to assess whether it is legally permissible for you to accept loans from the said party. RBI lays down many regulations as to who can accept deposits. The definition of ‘deposit’ as specified by RBI covers a wide range of transactions. You can refer to the FAQs released by RBI for this purpose. (Questions 34 and 78 may be helpful to you).
Interest paid on loans can be claimed as a deduction from the income earned during the year. But you may also have to comply with provisions of Income Tax Act dealing with TDS (Deduction of Tax at Source) (Refer Section 194A).
Again, what I have mentioned above is just indicative and not comprehensive.