Moonlighting Income in India: Tax Implications Decoded

Introduction: Moonlighting has become a prevalent trend in India, marked by individuals undertaking secondary employment without their primary employer’s knowledge. This article delves into the multifaceted landscape of moonlighting, exploring its meaning, tax implications, and the criteria under the Income Tax Act, 1961, distinguishing moonlighting income as salary or business/professional fees. Additionally, it delves into the Presumptive Taxation Scheme for Professionals and elucidates the crucial distinctions between an employee, contractor, and freelancer in the context of moonlighting, offering a comprehensive guide to navigate the intricacies of this evolving work landscape.

Moonlighting Income – Meaning

The Oxford Dictionary meaning of Moonlighting is to have a second job secretly, usually without paying tax on the extra money that is earned.

The Cambridge Dictionary meaning of Moonlighting is the act of working at an extra job, especially without telling your main employer.

Thus, moonlighting means taking up another job or the side hustle that a person takes in addition to regular employment, usually without the consent of the primary employer.

The COVID-19 pandemic has led to a significant increase in moonlighting in India.

There are a number of reasons why employees in India are choosing to moonlight. Some employees are doing it to supplement their income and meet their financial obligations, while others are doing it to gain new skills or experience, expand their professional network, or explore potential career paths or to start their own businesses.

There is no separate mention of moonlighting in the Income Tax Act, 1961. However, the income earned from additional assignments / moonlighting income is still taxable under the Income Tax Act, 1961.

This means that taxpayers who earn income from moonlighting must declare it in their income tax return and pay tax on it at the applicable tax rates.

Tax Implications of Moonlighting

The tax implications of additional income can vary depending on the specific circumstances of each individual.

Moonlighting income from the second employer can be received either as salary or professional fees.

If moonlighting income is received as salary, it will be taxed under the head “Salary” and the taxpayer can claim the deductions and allowances as allowed under the head “Salary income” under the Income Tax Act, 1961.

If moonlighting income is received as business income or professional fees, it will be taxed under the head “profits and gains under the head business and profession” or “Other sources” and the taxpayer can claim the deductions and allowances as allowed under the head “profits and gains under the head business and profession” or “Other sources” under the Income Tax Act, 1961. This includes deductions for business expenses, depreciation, interest on loans, salaries and wages paid to employees, and bad debts etc.

Moonlighting Income as Salary – Income Tax Act Criteria

Circumstances in which moonlighting income is considered as salary under Income Tax Act, 1961: An income can be taxed under the head salaries only if there is a relationship of an employer employee between the payer and the payee. If this relationship does not exist, then the income would not be deemed to be income from salary under the Income Tax Act, 1961.

Moonlighting Income as Business/Professional Fees – Income Tax Act Criteria

Circumstances in which moonlighting income is considered as business income or professional fees under Income Tax Act, 1961: Moonlighting income of a business or professional nature is taxed under the head PGBP- Profits and Gains from Business and Profession under the Income Tax Act, 1961. This is because moonlighting income is considered to be income from a business or profession carried on by the taxpayer.

For example, a software engineer who works full-time for a tech company might also moonlight as a freelance web developer. This moonlighting income would be considered to be business income, as the taxpayer is providing services to clients for a profit.

Another example is a doctor who works full-time at a hospital might also moonlight as a private consultant. This moonlighting income would be considered to be professional income, as the taxpayer is providing specialized medical services to clients for a fee.

The taxable income under the head PGBP is computed in accordance with the provisions of Section 29 to 43D of the Income Tax Act, 1961. These provisions allow for the deduction of certain expenses incurred in the business or profession, such as rent, salaries, and interest etc.

When filing their income tax returns, taxpayers who have moonlighting income from a business or profession should disclose this income under the head PGBP.

Presumptive Taxation Scheme for Professionals

Under Section 44ADA of the Income Tax Act, 1961, individuals and partnership firms engaged in specified professions can declare 50% of their gross receipts as their taxable income, without maintaining detailed books of accounts.

To be eligible for the Presumptive Taxation Scheme for Professionals under Section 44ADA of the Income Tax Act, 1961, individuals and partnership firms must meet the following criteria as prescribed under the section 44ADA of the Income Tax Act, 1961 –

i. Resident Status: The professional must be a resident of India.

ii. Specified Professions: The professional must be engaged in one of the specified professions listed under Section 44AA (1) of the Income Tax Act.

iii. Gross Receipts Limit: The gross receipts from the eligible profession should not exceed Rs. 75 lakhs in the previous financial year.

For example, Mr. Rahul is an architect who earns a salary of Rs. 30 lakh per annum from his full-time job at an architectural firm. Additionally, he takes on freelance architecture projects, generating an income of Rs. 15 lakhs in the previous financial year. Mr. Rahul’s total income from both sources is Rs. 45 lakhs.

Under the regular method of tax computation, Mr. Rahul would need to maintain detailed books of accounts for his freelance income and claim deductions for expenses incurred. This process can be time-consuming and complex.

In the above case, Mr. Rahul can opt for the Presumptive Taxation Scheme for Professionals. Since his gross receipts from freelance architectural services (Rs. 15 lakh) fall within the eligibility limit of Rs. 75 lakhs, he can declare 50% of his freelance earnings (Rs. 7.5 lakh) as taxable income.

Therefore, Mr. Rahul’s total taxable income for the year would be Rs. 37.5 lakh (Rs. 30 lakh salary income + Rs. 7.5 lakh freelance income). This simplified approach reduces his compliance burden and allows him to focus on his professional work.

Difference between an Employee, Contractor and Freelancer

In the context of moonlighting income, it is essential to understand the distinction between an employee, contractor, and freelancer to ensure compliance with tax laws, avoid potential legal issues, and make informed decisions about the type of moonlighting work under the India Income Tax Act, 1961.

Both individuals and businesses should carefully assess the nature of the work arrangement to ensure proper classification and fulfil their respective obligations.

The terms “employee” and “contractor” and “freelancer” have distinct meanings in the context of the India Income Tax Act, 1961. Understanding these differences is essential for both individuals and businesses to ensure proper tax compliance.

Employee: An employee is an individual who is hired by an employer to perform work under the employer’s control and supervision. The employer has the right to direct the employee’s work, determine their work schedule, and provide them with the necessary tools and equipment. Employees are typically entitled to various benefits, such as provident fund contributions, gratuity, and paid leave.

Contractor: Contractors are independent providers of services, working for clients on a contractual basis. They operate independently and are not considered employees of the clients they serve.

Contractors have the freedom to manage their own work methods, schedule, and tools, but are not considered employees and are not entitled to employee benefits.

Freelancer: A freelancer, also known as an independent contractor, is an individual who offers their services to clients on a per-project or task-based basis.

Like contractors, freelancers are self-employed individuals who manage their own work schedule, methods, and tools. They are not entitled to employee benefits and typically handle smaller, more routine tasks that individuals with general skills can complete. Freelancers may work on short-term projects or ongoing assignments depending on client needs. Freelancers are not considered employees and are not entitled to employee benefits.

Conclusion

The trend of holding multiple jobs at the same time, known as Moonlighting, has become increasingly popular in recent years, especially in the fields of technology and information technology.

While moonlighting provides individuals the opportunity to increase their earnings and explore various career paths, it is essential to be aware of the tax consequences of this practice. Moonlighting raises legal and tax considerations, necessitating careful evaluation to ensure compliance and avoid potential repercussions.

In India, moonlighting income is taxable under the Income Tax Act. The specific tax treatment depends on the nature of the moonlighting work and the classification of the taxpayer as an employee, contractor, or freelancer.

Taxpayers who earn income from moonlighting must declare it in their income tax return and pay tax on it at the applicable tax rates. To ensure compliance and avoid penalties, taxpayers should accurately report all moonlighting income and seek professional guidance if needed.