Income tax

Tax consequences of undeclared work: Undeclared work with a regular job? Know the tax implications

By Nitesh Buddhadev

Undeclared work means having a secondary job while continuing to work for the main employer. Often secondary work without the knowledge of the main employer. Secondary work can be outside the working hours of the main job, i.e. at night or on weekends. Recently, a company laid off employees for Moonlighting while others allowed Moonlighting under certain conditions. Let’s understand the tax implications of undeclared work income. There is no separate mention of moonlighting in income tax. The income of the second employer can be received either in the form of salary or in the form of professional fees.

Suppose Preeti works for employer A and she works for employer B on weekends. She is on the payroll of both employers and receives a salary. Both employers will consider a standard deduction of Rs. 50,000 and 80C deductions. In addition, both employers will determine the tax payable after taking into account the lower tax brackets. Therefore, the TDS deducted by each employer will be less than their overall tax payable.

Employer A Employer B Total income Remarks
Salary 15,00,000 8,00,000 23,00,000
Standard deduction 50,000 50,000 50,000 Limited to Rs. 50,000
80C deduction 1,50,000 1,50,000 1,50,000 Limited to Rs. 1,50,000
Total income 13,00,000 6,00,000 21,00,000
TDS Deduction 2,10,600 33,800 2,44,400
Total tax payable 4 60 200
Balance of tax payable 2,15,800

To avoid interest and penalties on late payment of tax, Preeti has to pay installments on respective due dates throughout the year for the balance of tax payable of Rs. 2,15,800 .

If the existing employer has a flexible policy for moonlighting, then Preeti can declare the salary of employer B in the tax return to be submitted to employer A and the TDS will be deducted accordingly by employer A Preeti need not worry about tax prepayment in this case.

On a separate note, the provident fund, if any, will be deducted by both employers. If the employee’s total contribution to the provident fund exceeds Rs. 2.5 lakh for the year, interest on the contribution exceeding Rs. 2.5 lakh will be subject to tax. Interest on the provident fund is credited by the provident fund office and therefore TDS on interest income, if any, would be deducted by the provident fund office.

Also Read: How TDS Works on Social Media Influencers

Now suppose that Zarna works for Employer C and works for Employer D on weekends. She receives professional fees from employer D. Zarna can claim expenses incurred for her business/profession such as meeting expenses, travel, office rent, electricity costs, salary of her staff, laptop depreciation, etc. as business expenses and deduct them from taxable income.

Alternatively, Section 44ADA of the Income Tax Act allows a professional in specified professions to offer only 50% of their professional fees for tax. This rule assumes that 50% of professional fees received would be spent on business purposes and only the remaining 50% is treated as business/professional income and taxed accordingly. The occupations specified to apply for u/s 44ADA benefits are legal, medical, engineering or architectural, accounting, technical consulting, interior design, motion picture artist, attorney, corporate secretary, business, information technology.

The professional fees received must not exceed Rs 50 lakh to claim the benefit of flat tax u/s 44ADA. Suppose Zarna receives a salary of Rs. 15 lakhs from Employer C. His taxable salary income after standard deduction and 80C deductions would be the same as Preeti i.e. Rs. 13 lakh and TDS deducted will also be the same Rs. 2,10,600.

Suppose Zarna receives professional fees of Rs 8 lakhs from Employer D and TDS is deducted 10% i.e. Rs. 80,000. However, Zarna’s income from professional fees will be taxed at @ 50% of gross income u/s 44ADA and hence only Rs. 4 lakh will be taxable. Hence, his total income subject to tax would be Rs. 17 lakh (13 lakh salary + Rs. 4 lakh professional income). The total tax liability would be Rs. 3,35,400 of which Rs. 2,90,600 is already deducted as TDS (TDS salary Rs. 2,10,600 + Rs. 80,000 TDS on professional fees). Hence, the tax payable would be Rs. 44,800.

Read also: How is the tax on the collection of employee leave calculated?

It must be kept in mind that if the professional fees exceed Rs. 20 lakhs, then GST registration must be obtained.

As seen in the case of Preeti and Zarna above, although their incomes are the same, the tax liability for Zarna is significantly lower by Rs. 1,24,800. This advantage is due to the flat-rate taxation of professional fees. Wherever possible, earnings from undeclared work should be collected in the form of professional fees rather than wages.

(The author is a chartered accountant and founder of Nimit Consultancy)