Know the tax implications of moonlighting

Even if your side-gig, irrespective of its nature, escapes the attention of the regular employer, it will not escape the attention of the tax department

Published: 24th October 2022 09:58 AM  |   Last Updated: 24th October 2022 09:58 AM   |  A+A-

Moonlighting, quiet quitting, productive paranoia

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Express News Service

NEW DELHI:  Moonlighting, a secret second job while employed regularly elsewhere, has its consequences, not just in the form of losing your regular job when caught by the employer but also in terms of taxation.

Even if your employer does not get a wind of your side-gig, the tax officials would come to know about it. So, the moonlighters also have to pay taxes for the earnings made from the second job, freelance assignment or a consultancy – whatever the nature of the side-gig is.

Tax department knows
When you sign up for a freelance assignment or a consultancy service, your client would invariably deduct TDS from the payment made to you or even claim input tax credit (under GST) for the services availed from you. A TDS or an ITC claim means the tax department has recorded the transaction between you and the client, unless the transaction is all cash.

Once your client has deducted TDS, the same gets reflected in Form 26AS, which has the summary of all the income on which TDS is deducted. “In case of freelancing income (if in the nature of professional income), TDS provision will apply if the aggregate total amount exceeds 

R30,000 in a year,” says Sandeep Sehgal, Partner-Tax, AKM Global, a tax and consulting firm.
According to Saurrav Sood, Practice Leader (International Tax) SW India, there are no ways by which the moonlighter can avoid the withholding tax and thus the subsequent reporting. 

“Where the payments are beyond the threshold limit of withholding tax, the provisions will kick in and taxes shall be withheld, which will eventually get reported in Form 26AS along with Form 16A,” he added. 

Form 16 is issued by the employers in case of salary income, and it is a TDS certificate comprising income earned from salary and TDS deducted thereon. However, your employer may not know about your freelance or side-gigs unless they have access to your form 26AS.

“Ordinarily, your employer wouldn’t have access to your income tax portal,” says Sandeep Sehgal, Partner-Tax, AKM Global. So, unless the employer asks the employee to submit a copy of the Form 26AS, it is very unlikely that they will get to know about such activities. 

How will you be taxed?
Now that you know that your side-gig, even if it escapes the attention of your regular employer, it will not escape the attention of the tax department, the question is how these earnings will be taxed.
You have to disclose the income under two heads in the income tax returns - - first under the head ‘salaries’ and next under the head ‘profits and gains of business or profession’

“It is important to note that while under the head salaries the gross income (after few predefined deductions) is liable to income tax, but professional income under freelancing is only taxable to the extent of the profits, which remain after deducting all the expenditure incurred for rendering the services,” says Vivek Jalan, Partner, Tax Connect Advisory.

Expenses incurred for the freelancing work -- spent fully and exclusively for the purpose of the work and incurred during the tax year, and which are not capital expenditure or personal expenditure of the freelancer – are allowed to be deducted as expenditure.

Such expenses may include items like rent of the property, travel expenses, entertainment or hospitality expenses, domain registration and apps purchased, etc.

Jalan also reminds of the fact that in case the value of freelancing services provided is more  than Rs 20 lakh a year, GST would also be charged on the professional services provided by the person to clients.

Which ITR form should one file?
If one is earning from more than one source, it could become difficult to ascertain which Income Tax Return (ITR) form one should file. And in case one is moonlighting, it could become even more confusing.

According to Saurrav Sood of SW India, where the second employer is also paying such income as salary, then the ITR which is applicable to the salary earner will be valid – ITR form 1.

However, where the amount is paid as consultancy charges -- under retainership agreement or on a project basis, then ITR 3 will apply.  If one opts for presumptive taxation, then they can file ITR-4.
A freelancer can opt for the presumptive taxation scheme, if the income from professional services provided as the total gross receipts do not exceed Rs 50 lakh in a financial year. 

“Under the presumptive scheme, a flat deduction of 50% of the gross total receipts is allowed. Balanced receipts or a sum higher than that shall be considered the profits and gains for the purpose of taxation under the head Profits and Gains of business and profession,” says Sandeep Sehgal of AKM Global.

Tax on side-gigs

TDS is deducted from payments made for freelance work or consultancy services provided, the TDS, thus, deducted gets reflected in form 26AS

In case of freelancing income, TDS provision will apply if the aggregate total amount exceeds L30,000 in a year

Earnings from freelance work or consultancy services are treated as Profits and Gains from business or profession

Professional income under freelancing is taxable to the extent of profits made after deducting the expenditure incurred for rendering the services

If the value of freelancing service is more L20 lakh a year, GST would be charged on the services provided

A freelancer can opt for presumptive taxation, if earnings from professional services provided do not exceed L50 lakh in a financial year.



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