Failure to disclose any income can lead to penalties and legal issues.
An increasing number of professionals, especially in the information technology sector, nowadays take to moonlighting to supplement the salary from their full-time jobs with extra income from freelancing, consulting or a part-time job.
Those who take this road must understand the tax laws associated with moonlighting income, report their extra earnings accurately, and choose the appropriate form when filing their income tax return (ITR).
They must also evaluate whether they would benefit from opting for the presumptive tax scheme (PTS).
Says Ankit Rajgarhia, principal associate at Karanjawala and Co. Advocates: "Moonlighting refers to the act of working on a second job or engaging in additional employment, beyond one's regular or primary job."
"Often, IT professionals undertake freelance projects, consulting gigs, or part-time jobs alongside their full-time employment. They must bear in mind that income earned through moonlighting is taxable," Rajgarhia adds.
Taxation of moonlighting income
The Income-Tax Act doesn't have any specific provisions for moonlighting. How the extra income is taxed depends on whether it comes in the form of salary, professional fee, or business income.
Says Tabrez Malawat, partner, The Guild: "If the moonlighting income is an additional salary, it is taxed under the head 'Salary'. The tax rate that applies is based on the relevant slab rates."
"However, if the moonlighting income is derived from freelance work or professional services, it falls under 'Profits and gains from business or profession'," Malawat explains.
This income, accordingly, is subject to the tax applicable to business or professional income. Appropriate deductions can also be availed on such income.
The choice of ITR form also depends on the nature of income.
Says Soayib Qureshi, partner, PSL Advocates & Solicitors: "To include such income in the ITR, the additional income must be shown in ITR-1 if it is a salary, ITR-3 if it is income from a contractual relationship, and ITR-4 if the person avails of PTS for income from business or profession."
Adopt presumptive tax scheme?
PTS simplifies the calculation and declaration of income for certain professionals, small business owners, and freelancers.
"Under this scheme, the income is assumed to be a specific percentage of the total turnover or gross receipts," says Nikhil Varma, managing partner, MVAC Advocates & Consultants.
Varma adds that PTS can benefit people with moonlighting income by freeing them from the burden of maintaining extensive books of accounts.
Says Adithya Reddy, international tax advisor: "If a moonlighting individual's income comes from professions specified in Section 44ADA, PTS allows the individual to be taxed only on 50 per cent of her professional fees."
Qureshi adds that showing additional income as business or professional income comes with the advantage that expenses incurred in executing the second job can be claimed as a deduction.
Maintain records of payments received
Maintain all the relevant records of income earned through moonlighting, including invoices, receipts, and payment details, so that you are able to report your income accurately.
Failure to disclose any income can lead to penalties and legal issues.
Says Rajgarhia: "Familiarise yourself with the deductions and exemptions available under the tax laws, which can help lower your overall tax liability. Consult a tax professional to ensure you claim all of them."
If the moonlighting income was in the form of a salary from two employers, obtain Form 16 from both.
Says Malawat: "Use these Form 16 certificates to file your ITR. Also, obtain Tax Deducted at Source (TDS) certificates from the employer(s) who have deducted TDS on the moonlighting income. Report it in the appropriate ITR form."
The I-T Department is aware of the TDS from your side hustle.
Says Reddy: "The taxpayer should closely monitor Form 26AS, which encompasses the TDS on all of their income."
Any discrepancy between the TDS on all their income sources and the ITR could prompt the tax department to issue a notice.
Select correct ITR form to report income from side hustle
Form ITR-1 or SAHAJ: Suitable for resident individuals with total income up to Rs 50 lakh, salary from multiple employers, income from a single house property, income from other income sources, and agricultural income up to Rs 5,000.
Form ITR-2: For those with capital gains, income exceeding Rs 50 lakh, income from more than one house property, directorship in a company, equity shares in an unlisted company, foreign income, resident but not ordinarily resident (RNOR) or non-resident, having loss brought forward, or loss that needs to be carried forward.
Form ITR-3 or ITR-4: Appropriate for moonlighting income from freelance work or professional services.
No income from capital gains, use ITR-3. Have income from capital gains, use ITR-4.
Source: The Guild
Feature Presentation: Ashish Narsale/Rediff.com
