Moonlighting comes under taxman's glare

Many people take up side gigs, part-time jobs, or freelance alongside their primary employment to earn some extra income. This additional work done alongside a primary job is referred to as moonlighting. Moonlighting involves taking on multiple jobs simultaneously. During COVID-19 pandemic, moonlighting became quite common, leading to some controversy. Some companies even terminated employees for engaging in moonlighting, considering it unethical. Instead of delving into the ethics of moonlighting, let’s discuss whether the earnings from moonlighting need to be reported in your Income Tax Returns (ITR) and whether paying income tax on them is necessary.

Moonlighting refers to additional work done for extra income alongside a primary job. To put it simply, imagine you work for a company for nine hours a day. After finishing your office duties, you engage in freelance work for another company or vendor. The work you do after returning home is considered moonlighting, and the income earned from it is termed moonlighting income.

There aren’t any specific provisions in tax law for moonlighting income. However, this doesn’t mean that extra income isn’t taxable. Whether income tax applies depends on the nature of the earnings – whether it’s received as a salary, professional fee, or business income.

To report moonlighting earnings accurately, it’s essential to carefully select the appropriate ITR form. If moonlighting income is received as salary, it should be shown under the ‘Salary’ head in the ITR-1 form. Depending on the tax slab applicable after deductions and exemptions, tax should be paid accordingly. Although you may have multiple sources of income, you can claim deductions such as Standard Deduction, 80C, 80D only once.

Some people receive payment for side jobs as employees. However, most people who earn from gig work, freelancing, or temporary work consider it as business or professional income. In this scenario, the ITR-1 form cannot be used. Instead, they must choose between ITR-3 and ITR-4. These forms are designed for individuals with business or professional income. If additional income is earned as business income and one opts for the Presumptive Taxation Scheme (PTS), then ITR-4 needs to be filled. Income earned as business income exceeding 50 lakhs can be reported in ITR-3.

When companies or vendors pay for moonlighting work, they deduct TDS (Tax Deducted at Source). This deducted tax is deposited into your PAN-linked account by the government. This way, the government becomes aware of your moonlighting income. Rather than concealing it, it’s advisable to declare moonlighting income in your returns and pay taxes. Otherwise, you may receive a notice from the Income Tax Department, accusing you of tax evasion and imposing hefty penalties.