The Income Tax Department has recently taken action to address the issue of individuals failing to disclose their additional income from moonlighting activities in their Income Tax Returns (ITRs). Moonlighting refers to the practice of working a second or third job alongside one's primary employment, often without informing tax authorities. In an effort to curb tax evasion, the tax department has begun sending notices to individuals who have neglected to declare their supplementary earnings.
According to reports, the notices are being sent to individuals whose primary source of income is their regular employment, but who have neglected to mention their supplementary earnings in their ITR filings.
Detecting these undisclosed incomes was made possible through careful scrutiny of data, as most payments were made online, including some received from overseas accounts. Upon investigation, it was discovered that many IT, accounting, and management professionals received monthly or quarterly payments from multiple companies. Yet, they only declared income from their full-time employment on their tax returns.
The Detection of Undisclosed Income
The tax department was able to identify these undisclosed incomes through meticulous data analysis. Many of the payments associated with moonlighting were made online, including some received from overseas accounts. By scrutinizing this data, the tax authorities were able to detect instances where individuals, particularly those in IT, accounting, and management professions, were receiving monthly or quarterly payments from multiple companies. However, these individuals were only reporting income from their full-time employment in their tax filings.
Notices and Undeclared Payments
The initial phase of notices targeted individuals whose average undeclared payments ranged between Rs 5 lakh and Rs 10 lakh annually. These notices were primarily issued for the financial years 2019-2020 and 2020-2021. The tax department has already sent over 1,100 notices to individuals who failed to disclose their moonlighting income. It is important to note that these notices are not solely related to moonlighting; the focus is primarily on incorrect income declaration. In some cases, individuals were found to be underreporting their income, with the undisclosed amount being double that of their reported salary. The tax department is also investigating instances of cash payments.
Rise of Moonlighting during the Pandemic
The practice of moonlighting gained significant traction during the pandemic, particularly within the IT sector. With remote work becoming the norm, many individuals sought supplementary employment to augment their primary incomes. However, it is crucial to understand that engaging in secondary employment or moonlighting is not illegal or against tax laws. The focus of the tax department's efforts is to ensure accurate income disclosure and compliance with tax regulations.
Proper Reporting and Compliance
To comply with income tax laws, individuals who are employed concurrently by multiple employers can use Form 12B to provide details of their salary from each employer. This allows for accurate tax deduction by considering the individual's total earnings. Similarly, individuals who engage in moonlighting activities and earn income through fees rather than salary can take advantage of Section 44ADA of the Income Tax Act. Under this provision, select professionals can declare only 50% of their fees for taxation purposes, presuming the other half as a business expense. This can significantly reduce the taxable income. However, it is crucial to note that this provision applies to professionals earning supplemental professional income alongside their salary, and it is important to inform the employer about these additional earnings for proper TDS calculation.
Importance of Transparent Reporting
Failing to report additional income from moonlighting activities can result in penalties and interest due to the oversight of deductions that should have been made through TDS. Transparent reporting of all income, including earnings from moonlighting, is essential to fulfill legal obligations and uphold financial integrity. It is important to remember that the objective of the tax department's actions is not to discourage moonlighting but to ensure accurate income reporting and compliance with tax regulations.
In conclusion, individuals engaging in moonlighting activities must be diligent about reporting their additional income in their tax filings. By doing so, they can avoid penalties and ensure compliance with tax laws. It is important to consult with tax professionals or seek guidance from the tax department to understand the specific reporting requirements and benefits available for individuals engaged in moonlighting.
The Impact of Moonlighting Income on Income Tax Returns
Moonlighting, or engaging in secondary employment alongside a primary job, has become increasingly common in recent years. Many professionals, including IT, accounting, and management professionals, have been taking on additional work to supplement their regular income. However, the Income Tax Department has started cracking down on individuals who have failed to disclose their moonlighting income in their Income Tax Return (ITR) filings. This initiative aims to curb tax evasion and ensure that individuals accurately report their earnings.
Understanding Moonlighting and Its Tax Implications
Moonlighting refers to the practice of working a second or third job in addition to one's primary employment. While it is not illegal or against tax laws, individuals are required to disclose all sources of income in their ITR filings. Failure to do so can lead to penalties and legal consequences.
The income earned from moonlighting is subject to taxation based on the employment status and the nature of the work undertaken. If an individual has a second job, the income received will be categorized as "Salary" and taxed accordingly. For self-employed individuals running their own business, moonlighting income will be considered "Profits and gains from business or profession" and taxed accordingly. Professionals offering services such as consulting or accounting will classify their income as "Professional fees" and be taxed accordingly.
Reporting and Taxation of Moonlighting Income
When filing their ITR, individuals must accurately report all moonlighting income. This includes providing specific details about the secondary employer or client, the amount earned, the nature of the work, and any related expenses. The reporting and tax treatment will vary depending on the source of income and individual circumstances.
It's essential to understand the appropriate tax category for calculating earnings from moonlighting. This ensures compliance with tax regulations and avoids penalties or scrutiny from the tax authorities.
Reporting Non-Monetary Compensation
In addition to monetary earnings, individuals must also report any non-monetary compensation received from moonlighting activities. This can include gifts, travel expenses, and meals provided by clients or employers. The value of non-monetary compensation should be determined based on the market value of the goods or services received. For example, if an individual receives a gift worth Rs 10,000, it should be disclosed as income of Rs 10,000 in the ITR. Similarly, if travel expenses or meals are covered by the client or employer, their respective values should be included as income in the tax filing.
GST Implications for Moonlighting Income
Moonlighting income may also be subject to Goods and Services Tax (GST) under specific circumstances. If an individual is engaged in providing taxable services and their annual turnover exceeds Rs 20 lakh, they are required to register for GST and collect it from their clients. Regular GST returns must be filed on a monthly or quarterly basis to ensure compliance.
Reducing Tax Liability for Moonlighting Income
There are several ways individuals can reduce their tax liability on moonlighting income. Claiming deductions for expenses related to moonlighting activities, such as travel expenses, equipment costs, and professional fees, can help reduce taxable income. Additionally, individuals earning less than Rs 50 lakh from moonlighting in a financial year can opt for the presumptive taxation scheme, allowing them to pay tax based on a percentage of their turnover.
Taking advantage of tax-saving investments, such as equity-linked savings schemes (ELSS), Public Provident Fund (PPF), and National Pension System (NPS), can also help reduce overall tax liability.
Avoiding Tax Notices and Penalties
To avoid receiving notices from the income tax department and potential penalties, individuals must accurately report all sources of income, including moonlighting earnings, in their ITR filings. Employers often deduct tax at source (TDS) based on an estimated taxable income figure. However, individuals should carefully review these estimates, ensuring that deductions such as standard deductions and 80C deductions are not counted twice.
To ensure accurate tax calculations, individuals should compute their total taxes, subtract the tax deducted by their employer (TDS), and pay any remaining balance as advance tax or/and Self-Assessment Tax.
Conclusion
Moonlighting can provide individuals with additional income and opportunities for professional growth. However, it is crucial to accurately report all sources of income, including earnings from moonlighting activities, in income tax returns. Failing to do so can lead to tax notices, penalties, and legal consequences. By understanding the tax implications, reporting requirements, and available deductions, individuals can navigate the taxation of moonlighting income and ensure compliance with tax regulations.
The author of this article is a Practicing Chartered Accountant in Delhi and practices in Litigations, Opinions, etc in GST and Direct Taxes. He is also Speaker and Trainer in GST.
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