• Notification Date: 10-08-2023
• Notification No: N/A

Income Tax Department Focusing on Income obtained through Moonlighting

The income tax (I-T) department in India has acted against professionals who have earned additional income outside of their regular salary but failed to report it on their tax returns. “According to sources familiar with the matter, over 1,100 notices have been issued, primarily focusing on the financial years 2019-2020 and 2020-2021. Interestingly, the income generated from moonlighting activities often exceeded the individuals’ regular salary,” said Amit Gupta, Managing Director at Sag Infotech. 

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. 

Raghuram Trikutam, CEO of Descrypt, said, “ITD has strict callouts around income obtained through moonlighting. This income must also fall under the purview of TDS, and if left unreported due to such deductions, this income attracts penalties and interest. As tax experts, we generally urge taxpayers to highlight this income to their current employers so that tax deduction happens correctly. There is also a section around Presumptive Taxation that such taxpayers might want to focus on should their income be less than Rs 50 lakh. Finally, paying advance tax on such income (as the regular income is TDS corrected) is also highly advisable.” 

Several companies have cooperated with the tax department by providing information about employees engaged in such practices. They have furnished the necessary Permanent Account Numbers (PANs) for the additional income. 

Gupta said, “In the initial phase, the income tax department sent notices to individuals whose average undeclared payments ranged between Rs 5 lakh and Rs 10 lakh annually. Officials have noted that such instances were more prevalent between fiscal years 2019 and 2021.” 

The department has yet to analyse the financial year 2021-22 data, but it expects the number of notices to increase. It is important to note that the notices are not solely related to moonlighting; the primary focus is on the incorrect income declaration, with some cases revealing double the income reported from regular salaries. The tax department is also investigating cash payments. 

"The rise in moonlighting activities, particularly among individuals working from home during the pandemic, has prompted these actions. However, the objective behind the tax department's efforts is to ensure proper income disclosure and compliance with tax regulations," said Gupta. 

In compliance with income tax laws, individuals employed concurrently by multiple employers can use Form 12B to share salary details, allowing accurate tax deduction by considering total earnings. Avinash Shekhar, Founder & CEO of TaxNodes, says, "Similarly, strict ITD regulations encompass earnings from moonlighting, necessitating TDS incorporation. Failing to report this income, which should also be subject to TDS, can result in penalties and interest due to the resulting deductions being overlooked. We emphasize transparent reporting of additional income in tax filings to fulfill legal obligations and uphold financial integrity. Under the Income Tax Act's Section 44ADA, select professionals can declare only 50% of their fees for taxation. This presumes half is a business expense, limiting taxed income. Moonlighting via fees, not salary, is tax advantageous. Income under Rs 50 lakh qualifies. Suppose professionals earn supplemental professional income alongside salary. In that case, they're permitted to inform their employer about other earnings for TDS calculation, potentially sidestepping the need for quarterly advance tax deposits and streamlining the process."