To avoid notice, align your tax return with TDS on freelance income

The income earned through moonlighting can be received as a salary, or as professional fees/business income

If you supplement your full-time salary with income from one or more side hustles, be careful while filing your income-tax return (ITR).

Extra income from freelancing, consulting, or part-time jobs must be reported accurately.

“If a person is moonlighting, which means being formally employed by more than one employer simultaneously, she is required to declare the income earned from all such sources. The person has to bear the tax liability on the total salary income,” says Rony Oommen John, advocate on record, Supreme Court.

The Income-Tax (I-T) Act even accounts for a scenario where one employer may become aware of an employee moonlighting with another employer.

“Section 192 of the Act provides that an employee may furnish to his employer the details of salary earned from simultaneous employment with another employer for calculation of tax deducted at source (TDS),” says John.

Usually, employers are unaware of moonlighting and contractually prohibit their employees from being on the rolls of another entity.

“There is no escaping the obligation to declare such income or to discharge the corresponding tax liability. The taint of illegitimacy or impropriety associated with such income has no bearing on its taxability,” says John.

Taxation of moonlighting income

The income earned through moonlighting can be received as a salary, or professional fees/business income. Each has a distinct tax treatment.

“If income from moonlighting is received as salary, the person’s overall income is taxed according to the applicable tax slabs,” says Pallav Pradyumn Narang, partner, CNK.

Moonlighting income derived from freelancing, consultancy, or any other form of self-employment is taxed differently.

“It would be taxable under the head ‘income from business or profession’. The taxpayer can claim a deduction for all the expenses incurred on earning the income,” says Naveen Wadhwa, vice-president, research and advisory at Taxmann.

Go for a presumptive tax scheme?

Moonlighters should evaluate whether they would benefit from opting for the presumptive tax scheme (PTS) under sections 44AD, 44ADA, and 44AE. 

Here, income is assumed to be a specific percentage of the total turnover or gross receipts.

If a person earns from professions listed in Section 44ADA, only 50 per cent of their fees are taxed under PTS.

PTS makes it simpler for small businesses and professionals to meet their tax liability.

“It simplifies accounting requirements, reduces paperwork and compliance, and lowers the risk of scrutiny from the tax authorities,” says Alay Razvi, partner, Accord Juris.

Moonlighters can benefit from PTS as it would free them from the hassle of keeping detailed books.

 

Ensure accuracy

Disclose all incomes accurately and completely. Always maintain records of all the income earned and expenses incurred. Keep all the relevant documents such as invoices, bank statements, payment receipts and TDS certificates.

“If eligible, opt for PTS to simplify your tax filing process,” says Razvi.

If you have two employers, get Form 16 from both. Check Form 26AS for details. Use these forms and TDS certificates to file your ITR correctly.

Use the correct ITR form. “If you earn a salary income from moonlighting, file your return in ITR-1 or 2. But if the income is ‘profits and gains of business or profession’, file your return in ITR-3 or 4,” says Narang.

The I-T department tracks the TDS for moonlighting income. Any mismatch with your ITR can lead to a notice.

So, file your ITR accurately or seek professional advice.

Income calculation under PTS explained

Section 44AD: For businesses (excluding those involved in plying, hiring, or leasing goods carriages) with a turnover of up to Rs 2 crore; income is presumed at 8% of turnover (6% if receipts are through digital means)

Section 44ADA: For professionals (like doctors, lawyers and architects) with gross receipts up to Rs 50 lakh; income is presumed at 50% of gross receipts

Section 44AE: For individuals engaged in the business of plying, hiring, or leasing goods carriages; income is presumed at Rs 7,500 per month per goods carriage for heavy goods vehicles

Source: Accord Juris