By Neeraj Agarwala
Most often an employment agreement restricts an individual from pursuing more than one employment at any given time. Given this limitation, many salaried people resort to providing consultancy services after employment hours on the sly. While these side hustles provide a source for some extra income, one must not overlook their income tax implications.
The key difference between a person earning income from salary and that from professional services is the absence of an employee-employer relationship in the later one. Taxable income from professional services is computed under the head ‘Income from business & profession’ and computation under this head is different from that under the head ‘salary’.
Taxes deducted at source
Firstly, for TDS purposes, the employer computes the annual taxable income of the employee after considering other income declared by the employee and standard and other deductions available and withholds appropriate taxes thereon. However, in the case of professional fees, TDS is deducted at a flat rate of 10% where the amount of fees paid or likely to be paid during a financial year exceeds Rs 30,000.
In the case of income from salary, since the annual income tax due is computed in advance by the employer and applicable taxes are deposited as TDS, employees are not required to deposit advance tax. However, in the case of moonlighting, one earns income other than income from salary and accordingly, may be required to deposit advance taxes on such side income.
Computation of taxable income
The income tax, both in the case of income from salary and income from business and profession, is calculated at the applicable slab rate of the individual. However, the difference is the method of computation of taxable income.
In the case of salary, taxable income is computed after providing for a standard deduction of `50,000 and other deductions like HRA, LTA etc. For income from business and profession, one is allowed to pay taxes on his net income; that is, after deduction of all business expenses including depreciation of assets used for business such as AC, furniture, laptops, etc. One can also offer income at a deemed profit rate of 50% if the total income is below Rs 50 lakh in the previous year.
Filing of return of income
The ITR 1 is not applicable for those who have income from business and profession. They should file their file their taxes in ITR 3 or ITR 4.
Knowing the difference in taxability between income from salary and income from profession, can enable accurate computation of taxable income and help avoid interest payments.
The writer is partner, Nangia Andersen India
KNOW THE RULES
Taxable income from professional services is computed under the head ‘Income from business & profession’
10% TDS is applicable if the total professional fee exceeds Rs 30,000
Use ITR 3/ ITR 4 to file returns if you earn salary plus professional fee