Take a side gig? This is how your income will be taxed
In recent years, especially during and after the Covid-19 pandemic, many have taken up side gigs in addition to their main jobs. These include being part of a music group that puts on shows on weekends, writing earning blogs, being a Youtuber or Instagram social influencer or taking up a guest professorship in any educational institution. The list is non-exhaustive. And this article does not address the legal or moral issues surrounding a side gig. This is how your secondary income will be taxed.
Treatment of self-employed income
Income or secondary income is generated by the sale of goods or services. It can be a specific skill or manual labor and therefore this income is taxed under the heading “Profits and gains of a business or profession”. The Income Tax (IT) Act allows expenses to be deducted from income from a business or profession; the assessee can also opt for the presumed income tax. For freelancers offering services in technical consulting, engineering, accounting, interior design, law, medicine or any other profession specified by CBDT, article 44ADA of the computer law will apply and the deemed income will be calculated at 50% of gross receipts. In case the profession or business is not mentioned, the presumed income will be calculated at 8% of the gross receipts.
Freelancers should be aware that the law does not very often allow the change of tax return from presumptive to regular taxation and vice-versa. If a assessee elects deemed income in one fiscal year and in the next fiscal year they opt out, then for the next five years the assessee cannot elect deemed income. Deemed income is not applicable if gross receipts exceed ₹2 crore.
Deduction of expenses
Freelancers can deduct certain expenses incurred for business purposes and to earn gross receipts. The only prerequisite for the deduction is that the expenses must be related to the business. The law allows the deduction of expenses such as repairs to office premises (rented or own) and equipment, rent paid for the property, office expenses such as supplies, etc. Travel expenses incurred to meet clients and transportation costs are types of expenses that can be claimed.
However, the law does not allow personal expenses to be deducted from gross receipts. “The assessee can decide the amount of common expenses that will be chargeable to business and personal expenses on a rational and logical basis and should use the same logic regularly,” says Archit Gupta, Founder and CEO of Cleartax.
The law, however, explicitly prohibits the deduction of certain expenses, such as income tax paid by oneself, any interest, penalties or fines paid for non-payment or late payment of income tax or any payment made to a parent above the fair market. assess.
Advance tax and TDS
The Income Tax Act specifies that anyone assessed whose tax liability is more than ₹10,000 is liable to pay withholding tax. An assessee who is not subject to flat rate income tax will have to pay installments quarterly. However, for assessees reporting deemed income, withholding tax does not need to be filed quarterly, but by March 15 each year, 100% of withholding tax must be paid. It should be noted that all installments paid until March 31 will be considered as tax installments.
Freelancers may receive their payments after deducting the payer’s TDS and it may happen that freelancers also have to deduct the TDS when making certain payments. However, not all self-employed persons are required to withhold tax at source. The Income Tax Act specifies that an individual or HUF is only required to deduct tax if the gross receipts for the previous year are ₹1 crore or more in the case of a business and ₹50 lakh or more from a profession.
Verification of GST applicability
Goods and Services Tax may also apply. Freelancers should check the law and comply with GST based on the goods and services provided, total turnover limits, and the states where they reside.
Side-gig income is one component of total income and will be taxed as business and professional profits and gains. Compliance with tax rules for other income items such as wage income, income from real estate property, capital gains and other income, is also required. ITR 3 may be relevant because, according to the Income Tax website, income from all heads can be filed in this form. You can benefit from professional assistance in filing the declarations, if necessary.