Moonlighting Income in India- Know the Income Tax Rules

What is Moonlighting?

Moonlighting is the buzzword in the IT sector currently. Moonlighting means taking up another job in addition with your primary job. If this secondary job is being done without informing the primary employer, it comes under moonlighting.

The COVID-19 pandemic has sparked a notable surge in moonlighting activities across India. This trend can be attributed to various factors driving employees to engage in additional work outside their primary employment. While financial concerns remain a prominent motivator, employees are also leveraging moonlighting opportunities to acquire new skills, broaden their professional networks, and explore alternative career paths, including entrepreneurship.

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Is Moonlighting Legal in India?

In India, there are two opposing views on moonlighting: one from the employees who want to earn extra income and the other from the employers who consider it unacceptable and unethical. Many employers have started to include a moonlighting policy clause in employment contracts to prohibit any outside employment or business activities. If an employee violates this clause, the employer can take legal action against them or terminate their employment. I.e., moonlighting in India is not illegal, but it is subject to contractual restrictions and the employer’s discretion.

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What are the tax implications of dual employment (moonlighting)?

There is no separate mention of moonlighting in the Income Tax Act 1961. However, the income earned from additional assignments / moonlighting income is still taxable under the Income Tax Act 1961.The tax implications of additional income can vary significantly based on individual circumstances.

Extra income earned through moonlighting can be received either as salary or professional fees, each having distinct tax treatment.

• As a salary
  In case an additional income earned from Moonlighting or a second job is received as a salary without any consent of the primary employer. Then the taxpayer may lead to complexity of tax on second income as the aggregated tax liability would be higher than the total TDS amount deducted by both employers. Here, his overall income is subject to lie in the tax slabs in accordance with the respective salaries. The 80C deduction limit of 1.5 lakh, a standard deduction of Rs. 50,000, PF contribution, and other tax benefits are key factors that unknowingly raise tax complexity for the employee who is cheating and secretly started working with another employer. He will be liable to pay tax on additional income in advance.
• As a professional fee
  Further, if someone is getting his additional income as a professional fee, then the taxpayer is liable to pay his tax on second income payables before their respective due dates, i.e., in advance. Otherwise, a hefty amount as a penalty he has to pay on his late payments. Moreover, his payable tax income is computed under "Profit & Gains from Business and Profession" labeled head after deducting the gross receipts of certain expenses such as travel expenses, depreciation of assets, internet & electricity bills, etc.
  Suppose someone is getting more than Rs. 30,000 as a professional or business fee, then TDS will be applicable on his/her extra income. Other than this, if someone offers the services that lie down in the specified professional category listed in section 44ADA and earns less than Rs. 50 lakh, then 50% of his overall professional fee is taxable without claiming any deduction of expenses.
• As a part-time self-employment
  In this category, employees receive their extra income for serving other people on a freelance or part-time basis. They are required to pay their extra income tax on additional income (tax on second income) under the head- "Income from other Sources" at applicable slab rates.

It's essential for taxpayers to accurately categorize their additional income and claim deductions appropriately to ensure compliance with tax laws and optimize their tax liabilities. Consulting with a tax expert can provide personalized guidance based on individual circumstances and ensure tax obligations are met efficiently.

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Why income tax department is sending notices to Moonlighters?

Many professionals earned extra money on top of their regular salaries (also known as moonlighting income), but they forgot to mention these earnings when they filed their taxes. The tax authorities have now sent notices to remind them to include this extra income. This highlights how important it is to be honest and complete when reporting earnings for taxes. This income needs to be reported in the ITR on the basis of the employment status and the nature of the work undertaken. To report moonlighting and other freelance income and file ITR, click here.

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Why are Tech Companies against Moonlighting?

Some tech companies are against moonlighting for various reasons as followings:

• Data and confidentiality breaches: Moonlighting may give employees the opportunity to divulge trade secrets or sensitive information if they are working in a similar industry and job. This can harm the competitive advantage and reputation of the primary employer.
• Loss of productivity: It may affect the quality and quantity of work done by the employees for their main job, as they may be distracted, tired, or overworked. This can reduce the efficiency and profitability of the primary employer.
• Conflict of interest: It might create situations where the employees have to choose between the interests of their primary and secondary employers, which may not always align. This can compromise the loyalty and integrity of the employees.
• Legal and ethical issues: Moonlighting may violate the terms and conditions of the employment contract, which may stipulate exclusivity, non-compete, or confidentiality clauses. This can expose the employees and the employers to legal risks and liabilities.

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How to Catch Moonlighting Employees?

Some indicators that an employee might be moonlighting are:

• Appearing tired and listless: Working long hours at two jobs can take a toll on a person’s physical and mental health. An employee who is moonlighting may show signs of fatigue, such as dark circles under their eyes, yawning, lack of concentration, and low energy. They may also lose interest in their work and become less engaged with their colleagues and customers.
• Having poor internet connection: An employee who is moonlighting may use their work hours to complete tasks for their other job, especially if they are working remotely. This can affect their internet bandwidth and cause them to have poor or unstable connections during meetings, calls, or presentations. They may also use this as an excuse to avoid accountability or communication with their manager or team.
• Giving delayed responses: An employee who is moonlighting may have difficulty managing their time and prioritizing their tasks. They may miss deadlines, forget assignments, or respond late to emails, messages, or feedback. They may also be less responsive to urgent or important requests or issues that arise during their work hours.
• Declining performance: An employee who is moonlighting may experience a decline in the quality and quantity of their work output. They may make more errors, mistakes, or oversights in their projects or reports. They may also lose their creativity, innovation, or initiative and become more passive or complacent in their role.

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How can a Company HR use the UAN to detect moonlighting by employees?

The company's HR owns a bonanza. He can prevent fraudulent activity and track moonlighting by employees. But how? Generally, every salaried employee has his own unique 12-digit UAN- Universal Account Number. Using this number, the HR of the company can easily find the name of the employees who have two EPF (Employees' Provident Fund) accounts. Likewise, he can catch the employees who are secretly working for other companies. Wipro, TCS, and many other companies caught their employees doing Moonlighting.

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What are Dual Employment laws in India?

Indian law formally defines rules and laws for employment conditions under the following amendments and acts in national policies for the well-being of a workplace:

The Factories Act, 1948: This law restricts double employment for adult workers who work in factories. Section 60 of the Act states that no adult worker shall work in any factory on any day on which he has already been working in another factory.

The Industrial Employment (Standing Orders) Rules, 1946: These rules regulate the conditions of employment in industrial establishments. Section 8 under Schedule I-B of the Rules states that a workman shall not engage in any other employment or profession that is against the interest of the industrial establishment.

The Shops and Establishments Acts: These are state-specific laws that regulate the working state of employees in shops and commercial establishments. Some of these laws, such as the Delhi Shops and Establishments Act 1954, prohibit an employee from working in excess of his lawful period of employment in any establishment or factory.

The Model Standing Orders for Service Sector, 2020: These are draft rules proposed by the Ministry of Labour and Employment to standardize the employment conditions for service sector workers. Clause 22 of the draft rules state that an employee shall not take up any other employment or business, or vocation while in service without prior permission from the employer.

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