Tax implications of moonlighting you must know
2 min read 04 Oct 2022, 11:17 PM ISTMoonlighting income in form of professional fees is better from taxation perspective
PremiumMoonlighting means taking up another job while still in employment with an organization. The second job is usually without the employer’s knowledge and hence the income earned from moonlighting can lead to tax complexities that the taxpayer must be careful about.
For instance, if the moonlighting income is received as salary, both the employers will consider standard deduction of ₹50,000 and 80C deductions to calculate the tax liability. Additionally, both the employers will take into account the basic exemption limit and consider the tax slab as per the respective salaries. This could lead to the TDS being deducted by each employer to be lower than the taxpayer’s aggregate tax liability (see table).
In the given example in the table, the balance tax payable of ₹226,200 must be paid as advance tax instalments on respective due dates, else the taxpayer will be liable to interest and penalty on late payment of tax.
Income from moonlighting can be received as professional fees too and the taxpayer can claim the expenses incurred for their business or profession, such as meeting expenses, conveyance, depreciation on laptop, etc. as a business expense and deduct it from the professional fees offered for tax.
Alternatively, section 44ADA of the Income Tax Act allows a professional engaged in specified professions to offer only 50% of their professional fees to tax. This rule presumes that 50% of the professional fees received would be spent for business purposes and hence only the remaining 50% is treated as income from business / profession and taxed accordingly. However, the fees should not exceed ₹50 lakh to avail presumptive taxation scheme.
Moonlighting income in the form of professional fees rather than salary is better from taxation perspective.
Let’s understand with an example. Say, Sandhya draws a salary of ₹14 lakh from Employer A. Her taxable income after standard deduction and 80C benefits will be ₹12 lakh and TDS of ₹179,400 will be deducted. Sandhya also moonlights in a consulting role and receives professional fees of ₹9 lakh. Here, 10% TDS will be deducted ( ₹90,000). Sandhya opts for presumptive taxation so only ₹4.5 lakh will be taxable (50% of gross income u/s 44ADA). Her total taxable income is ₹1,650,000 ( ₹12 lakh salary + ₹4.5 lakh professional income) and the total tax liability would be ₹319,800, out of which ₹2,69,400 is already deducted as TDS (salary TDS ₹179,400 + ₹90,000 TDS on professional fees). Hence, tax payable would be ₹50,400.
If you compare this to the example in the table, though the incomes are the same, the tax liability for Sandhya is significantly lower by ₹1,40,400.
Nitesh Buddhadev is a chartered accountant and founder of Nimit Consultancy.
