The income tax department has reportedly sent notices to many taxpayers for not reporting their income from moonlighting, or, freelance projects in their income tax returns (ITR).
Most of the notices issued so far relate to the financial years 2019-2020 and 2020-2021. The tax authorities identified these undisclosed earnings through data analysis, as many payments were conducted digitally, and a few originated from international accounts.
Therefore, it is important that you report any income you receive through moonlighting while filing your ITR so that you do not end up receiving a notice from the income tax department.
Says Archit Gupta, CEO, Clear, a fintech company: “Moonlighting means taking up another job in addition to one’s primary employment. The second job is typically taken without the employer’s consent at their regular job. Also, an employee may be barred from undertaking such an assignment by virtue of his employment contract with his employer.”
“Also, the income from moonlighting might result in complicated tax situations that the taxpayer needs to be aware of,” Gupta adds.
So, if you are moonlighting, you will need to disclose all such income in your ITR, either through ITR-3 or ITR-4, depending on the earnings. In fact, you should furnish specific details about your moonlighting income, including the name and address of the secondary employer or client, the earned income amount, the nature of the work undertaken, and any expenses incurred in relation to your moonlighting activities.
Income earned from moonlighting will have to be reported in the ITR on the basis of the employment status and the nature of the work undertaken. It is also be taxed accordingly.
If one has a second job, the income received will be categorised as “Salary” and subject to taxation accordingly. For those who are self-employed and run their own business, any moonlighting income will be taken as “Profits and gains from business or profession” and will be taxed accordingly.
Alternatively, if you fall under the category of those who offer professional services, such as consulting or accounting, the income earned will be classified as “Professional fees” and taxed accordingly.
The reporting of income and tax treatment and will vary depending on the source of income and the specific situation. Therefore, it’s equally important to understand the appropriate tax category for calculating one’s earnings from moonlighting.
According to Rajiv Bajaj, chairman and managing director, Bajaj Capital, non-monetary compensation, such as gifts, travel, and meals, can also be considered as taxable income.
“If you receive non-monetary compensation from your moonlighting activities, you need to disclose it on your ITR. The value of non-monetary compensation is usually determined by the market value of the goods or services received,” he says.
For instance, if you receive a gift worth Rs 10,000 from your moonlighting client, you need to disclose it on your ITR as income of Rs 10,000. If you travel for your moonlighting work and your client pays for your travel expenses, you need to disclose the value of the travel expenses as income on your ITR. And if your client pays for your meals while you are working for them, you need to disclose the value of the meals as income on your ITR.
Moonlighting income is subject to Goods and Services Tax (GST) under specific circumstances. If you are engaged in providing services that are taxable, and your annual turnover exceeds Rs 20 lakh in a financial year, GST will be applicable to your moonlighting earnings.
“If you meet these criteria, you will need to register for GST and collect GST from your clients. You will also need to file GST returns on a monthly or quarterly basis,” says Bajaj.
There are a few ways in which you can reduce your tax liability.
Claim Deductions: You can claim deductions for certain expenses related to your moonlighting activities, such as travel expenses, equipment expenses, and professional fees.
Opt For Presumptive Taxation Scheme: If your moonlighting income is less than Rs 2.5 lakh in a financial year, you can opt for the presumptive taxation scheme.
“This will allow you to pay tax on an ad-hoc basis, based on a percentage of your turnover,” says Bajaj.
Also, there are a number of tax-saving investments that you can make use of, such as equity-linked savings schemes (ELSS), Public Provident Fund (PPF) and National Pension System (NPS).
According to Gupta, if taxpayers receive their moonlighting income as salary, it can complicate the tax calculations and the taxpayer may have to be extra careful while filing their returns.
“For deducting tax at source (TDS), employers draw up an estimated taxable income figure. In such an estimation, both employers consider the standard deduction of Rs 50,000, whereas the taxpayer can claim it only once. They may also consider the 80C deduction, which may exceed the maximum limit of Rs 1.5 lakh in total,” says Gupta.
So, while filing taxes, the taxpayers will have to make these changes and bear the brunt of additional taxes and interests. To avoid this, the taxpayers must compute the total taxes, subtract the tax deducted (TDS) by the employer and pay the balance as advance tax, Gupta adds.