Salary of ₹20 lakh and side income of ₹5 lakh: Do you need to change your tax planning?

Tax planning becomes essential when you have a salary of ₹20 lakh alongside a side income of ₹5 lakh. Keep accurate track of freelancing income, TDS, expenses, and the tax regime, and ensure your records are updated throughout the year.

If someone has an annual salary of ₹20 lakh and earns an additional ₹5 lakh from another source, their total income becomes ₹25 lakh. Consequently, looking only at the tax on the salary is insufficient; accounting for the additional income is also crucial.

If your annual salary is ₹20 lakh and your other income is ₹5 lakh, your combined gross income will be ₹25 lakh; however, this does not mean that the entire ₹25 lakh amount will be taxed at a rate of 30%.

Applicability of different tax rates

Under the new tax regime, different tax rates apply to different income slabs. The 30% rate applies to the portion of taxable income exceeding ₹24 lakh. Additionally, a 4% Health and Education Cess is levied on the tax amount.

The source of the additional income matters

For instance, if your ₹5 lakh income comes from freelancing or consultancy, it may be classified as income from business or a profession. Therefore, maintaining records of bills, receipts, and expenses related to each income stream is vital.

This means it is not enough to simply track the money received; one must also consider the nature of the work performed and the expenses incurred in doing so.

When should you change your tax planning?

Calculating taxes is straightforward when your income is limited to just a salary. If you are also earning income through freelancing or consultancy elsewhere, you should maintain a comprehensive record of your earnings, expenses, TDS, and other relevant documents throughout the year. This ensures you won’t face difficulties gathering the necessary paperwork when it comes time to file your Income Tax Return (ITR).

Keep an eye on rising side income

Suppose your side income increases—say, from ₹5 lakh to ₹10 lakh or more; this could impact your total tax liability. In such a scenario, it becomes crucial to plan ahead by considering investment-related expenses and available tax exemptions.

Old vs. New Tax Regime

Taxpayers should compare the two tax regimes based on their income and the deductions available to them. While the old tax regime offered various exemptions, the benefits associated with them have diminished since the introduction of the new tax regime. Ultimately, the regime that suits you best depends on your specific income and the deductions you can claim.

Maintain records throughout the year

One should not limit their record-keeping merely to salary and other income receipts. It is essential to keep a running account of all earnings, expenses, and TDS details throughout the year to avoid facing any complications in the future.