De-Tax. Taking up a side gig? Here’s how your income will be taxed

Over the past few years, especially during and after the Covid-19 pandemic, many have taken up side gigs in addition to their primary jobs. These include being part of a music band that holds shows on weekends, writing remunerative blogs, being a Youtuber or an Instagram social influencer or taking a visiting faculty position at any educational institution. The list is not exhaustive. And this article is not about the legal or moral issues around a side gig. It is about how your side income will be taxed.

Treatment of freelance income

A side income or revenue is generated by selling goods or services. It may involve a specific skill or manual labour and therefore this income is taxed under the head “Profits and gains from Business or Profession.” The Income Tax (IT) Act allows for expenses to be deducted from the revenue received from business or profession; the assessee can go for presumptive income taxation also. For freelancers offering services of technical consultancy, engineering, accountancy, interior designing, legal, medical or any other profession as specified by CBDT, Section 44ADA of the IT Act will apply and presumptive income will be calculated as 50 per cent of gross receipts. In case profession or business is not mentioned, the presumptive income will be calculated as 8 per cent of gross receipts.

Freelancers must be aware that the Act does not allow changing of income reporting from presumptive to regular taxation and vice-versa very often. If an assessee goes for presumptive income in a financial year and in the next financial year, he/she opts out of it, then, for the next five years, the assessee cannot choose presumptive income. Presumptive income is not applicable if the gross receipts exceed ₹2 crore.

Deduction of expenses

Freelancers can deduct certain expenses incurred for the purpose of business and for earning the gross receipts. The only precondition for deduction is that the expenses must relate to the business. The Act allows deduction of expenses such as repairs done at the office premises (both rented or own) and equipment, rent paid for the property, office expenses such as supplies, etc. Travel expenditure incurred to meet clients and conveyance charges are types of expenses that can be claimed.

However, the Act does not allow deduction of any personal expenses from the gross receipts. “The assessee can decide the amount of the common expenses which will be attributable for business and personal expense on some rational and logical basis and must use the same logic regularly,” says Archit Gupta, Founder and CEO of Cleartax.

 The Act, however, explicitly prohibits certain expenses to be deducted, such as income tax paid by self, any interest, penalty or fine paid for non-payment of or late payment of income tax or any payment made to a relative above the fair market value.

Advance Tax and TDS

The Income Tax Act specifies that any assessee whose tax liability is above ₹10,000 is liable to pay advance tax. An assessee who is not under presumptive income taxation will have to pay advance tax instalments every quarter. However, for assessees declaring presumptive income, advance tax need not be deposited every quarter, but by March 15 every year, 100 per cent of the advance tax must be paid. It must be noted that all the deposits made till March 31 will be considered as advance tax.

Freelancers may receive their payments after the deduction of TDS from the payer and it may happen that freelancers may also have to deduct TDS while making certain payments. However, not all freelancers are required to deduct tax at source. The Income Tax Act specifies that an individual or an HUF is liable to deduct tax only if the gross receipts in the preceding financial year are ₹1 crore or above in the case of business and ₹50 lakh or above from a profession.

Checking for GST applicability

Goods and Services Tax may also be applicable. Freelancers must check the Act and be GST-compliant based on the goods and services provided, the total turnover limits and the States where they reside.

The side-gig income is one of the components of total income and will be taxed under profits and gains from business and profession. Compliance with tax rules for other heads of income such as income for salary, income from house property, capital gains and other income, is also required. ITR 3 may be relevant as, income from all the heads can be filed in this form, according to Income Tax website. You can avail professional assistance to file the returns, if need be.

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