Income Tax On Moonlighting

What is Moonlighting ?

Moonlighting involves taking up a second job while still being on a company's payroll. While such assignments or jobs can bring in additional income. The side job may be outside the working hours of the primary job i.e. at night or on the weekends. Recently, one company has fired employees for Moonlighting whereas some have allowed Moonlighting subject to certain conditions.

Income Tax Perspective

The Income Tax (IT) authorities have cautioned moonlighting employees that it can have some tax implications. It is pertinent to note that there are no separate provisions for moonlighting in the Income Tax Act, 1961.

The tax authorities have urged employees to declare any additional income in their tax returns and pay the applicable tax. The report added that if such income is detected later, the IT department can impose penalties and initiate an inquiry under Section 148A of the IT Act.

The income received as business income or professional fees from moonlighting may be enquired into in a later period of time and if undeclared income is found, penalties may also be imposed. The recipient must declare such income in his or her tax returns and duly pay the applicable income tax rate.  A payee not deducting tax at source (TDS) or a recipient not declaring such income would amount to violation of the Income Tax law and invite action.

From the perspective of an individual or a company making a payment of more than Rs 30,000 to a person in return for a Contract job (under Section 194C of Income Tax Act, 1961) or pays a Professional fee (Section 194J, IT Act), they are liable to deduct TDS at the applicable rate. The TDS liability is also applicable if payments to the person exceed Rs 1 Lakh in a financial year under Section 194C. Payments here include the amount charged as royalty, professional services fee, technical service fee, or non-compete fee under Section 28(VA) of the Income Tax Act.

If the taxpayers receive the income from moonlighting as salary, then the standard deduction can only be claimed from either employer and not from both. The same case applies to deduction of tax under Section 80C, which can be claimed only once. Thus, the total deductions must be computed, keeping in mind the ceiling limits of the deductions, (Rs. 50,000/- for standard deduction and Rs. 1,50,000/- for deduction under Section 80C). It is also important that from total taxes, the TDS deducted by both the employers must be subtracted and the balance must be paid as advance installments.

People engaging in moonlight, therefore, have to consider the consequences of tax alongside potential repercussions at their primary place of employment.

Let us understand with an example:

Suppose Mukul is working for employer A and he takes up work with employer B on weekends. He is on the payroll of both employers and receiving salary. Both employers will consider standard deduction of Rs. 50,000 and 80C deductions. Also, both employers will determine tax liability after giving effect of the lower tax slabs. Hence the TDS deducted by each employer will be lower than his aggregate tax liability.

                                                                                                                                       

	Employer A	Employer B	Total Income	Remarks
Salary	12,00,000	8,00,000	20,00,000
Standard Deduction	50,000	50,000	50,000	Restricted to Rs. 50,000
80C deduction	1,50,000	1,50,000	1,50,000	Restricted to Rs. 1,50,000
Total Income	10,00,000	6,00,000	16,00,000
TDS deduction	1,17,000	33,800	1,50,800
Total Tax liability			4,29,000
Balance tax payable			2,78,200

 

To avoid interest and penalty on late payment of tax, Mukul must pay advance tax instalments on respective due dates throughout the year for the balance tax payable of Rs. 2,78,200.

If existing employer has flexible policy for Moonlighting, then Mukul may declare the salary from Employer B in the income declaration to be submitted to Employer A and TDS will be accordingly deducted by Employer A. Mukul need not worry about advance tax payment in this case.