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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.

Source:- Livemint, ClearTax, Income Tax Act, 1961
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