Moonlighting means doing a job in an organization while doing another job. The second job is usually done without the knowledge of the employer and hence the income earned from moonlighting can lead to tax complications that the taxpayer should be wary of.
For example, if Chandni’s income is received as salary, both will consider the employer’s standard deduction. 50,000 and 80C deduction for computing tax liability. Additionally, both the employers will take into account the basic exemption limit and consider the tax slab as per the respective salary. This may lead to deduction of TDS by each employer from the total tax liability of the taxpayer (see table).
In the example given in the table, balance tax payable 226,200 should be paid as advance tax installments on the respective due dates, otherwise the taxpayer will be liable for interest and penalty on late payment of tax.
Income from moonlight can also be claimed as professional charges and the taxpayer can claim expenses incurred for his business or profession, such as meeting expenses, depreciation on vehicles, laptops, etc. do.
Alternatively, Section 44ADA of the Income Tax Act allows a professional engaged in specified professions to pay only 50% of his professional fees for tax. This rule assumes that 50% of the professional fee received will 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 lakhs for availing the estimated taxation scheme.
From a taxation perspective moonlight income is better in the form of professional fees rather than salary.
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Let us understand with an example. Say, Sandhya gets salary 14 lakhs from employer A. His taxable income after standard deduction and 80C benefit would be 12 lakh and TDS 179,400 will be deducted. Sandhya also moonlights in a consulting role and receives professional fees. 9 lakhs. Here 10% TDS will be deducted ( 90,000). Sandhya opted for presumptive taxation only 4.5 lakh will be taxable (50% of gross income under section 44ADA). his total taxable income is 1,650,000 ( 12 Lakh Salary + 4.5 lakh professional income) and the total tax liability will be 319,800, of which 2,69,400 have already been deducted as TDS (Salary TDS) 179,400+ 90,000 TDS on professional charges). Therefore, the tax payable will be 50,400.
If you compare this with the example in the table, although the income is the same, the tax liability for Sandhya is much less. 1,40,400.
Nitesh Buddhadev is a Chartered Accountant and the founder of Nimit Consultancy.
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