Navigating your Tax obligations for 2025-26 tax year and reporting unconventional income
Report earnings from secondary jobs in Income Tax Return
In the modern world, supplementing your primary income is becoming increasingly common, and with this additional cash flow comes the responsibility of understanding the tax implications. From freelance gigs, peer-to-peer lending, to fixed deposit interest, we'll walk you through the essentials of accurately declaring and managing your tax obligations when filing your Income Tax Return (ITR).
Side Hustles
Engaging in side activities like selling homemade crafts online, driving for ride-hailing services, or offering digital services such as graphic design or copywriting, involves taxable income. It's crucial to report this income accurately, considering common mistakes like underreporting cash payments or receipts. Seize the opportunity to save on taxes by understanding deductible expenses that can help maximize your tax breaks. Eligible expenses incurred wholly and exclusively for a side hustle can be claimed, such as internet and phone expenses, office supplies, and professional fees [1].
Unlike traditional employment, side incomes often lack withholding taxes, making it essential to calculate estimated taxes and deposit them under the advance tax route to steer clear of interest charges [1]. Maintaining detailed records of every financial transaction will simplify tax filing and provide evidence in case of any scrutiny from the tax authorities.
Interest Income (Fixed Deposits)
Interest generated from fixed deposits is treated as taxable income under the 'income from other sources' tax head. Tax rates vary based on individual tax slabs, with a 20% tax rate applied to those in the 20% tax bracket for interest derived from fixed deposits. However, the true tax liability might exceed the TDS deducted by banks, which may lead to additional payments during tax return filing [2].
double-check your interest income and the TDS against your bank statements, Form 26AS, Annual Information Statement (AIS), and Taxpayer Information Statement (TIS) to avoid discrepancies in reporting your income and taxes owed [2]. Many taxpayers erroneously believe that TDS covers their entire tax liability, which may not be the case for those in higher tax brackets [2].
Peer-to-Peer Lending
Interest derived from peer-to-peer lending platforms is also taxable under the 'income from other sources' category, with no TDS being deducted currently. Taxpayers must include this interest income in their ITR and pay the applicable tax [3]. If peer-to-peer lending activities are carried out at a substantial pace, they might be considered business income but usually are reported as 'other source' income. Proper documentation of lending transactions and platform statements is vital for accurate reporting [3].
Considerations for ITR Filing
Depending on your income sources, freelancers and gig workers should typically file using the ITR-3 or ITR-4 forms, as these forms accommodate business/profession income as well as income from other sources. Salaried individuals with additional income can opt for ITR-1 or ITR-2 if their side income is minimal, yet if your side income exceeds simple interest, ITR-3 becomes more advisable [3][4].
Advance Tax Payments and TDS
Since side hustle and P2P income often lack TDS, it's essential to estimate and pay advance tax in four installments throughout the financial year to prevent interest penalties under Sections 234B and 234C [1]. Fixed deposit interest usually has TDS deducted by banks; however, if your total tax liability exceeds the TDS deducted, pay the balance via advance tax. Check Form 26AS or Annual Information Statement (AIS) for TDS credits to ensure you avoid double taxation and avoid mismatches [1][2].
Deductible Expenses
For side hustles/business income, claim allowable expenses that are incurred wholly and exclusively, such as:
- materials and goods sold
- internet, phone bills related to business use
- home office rent or depreciation (if applicable)
- professional fees, advertising, travel expenses related to business
Note: For income from other sources like FD interest or P2P lending, no direct deductions related to earning the income are usually permitted [1].
By thoroughly tracking income, expenses, and tax payments, choosing the appropriate ITR form, and understanding TDS and advance tax implications, you can accurately report and comply with tax obligations for income from side hustles, fixed deposit interest, and P2P lending in the 2025-26 tax year, avoiding penalties and making the most of eligible deductions [1][2][4].
Sources:
[1] The Hindu, (2022, November 28). ITR filing: All you need to know about TDS credits, repayment of excess advance tax, and Latest updated ITR filing dates. https://www.thehindu.com/money-and-business/markets/its-its-its-itr-filing-all-you-need-to-know-about-tds-credits-repayment-of-excess-advance-tax-and-latest-updated-itr-filing-dates/article66037760.ece
[2] Moneycontrol, (2022, July 22). Fixed deposit tax rules you should know before opening an FD in FY 21-22. https://www.moneycontrol.com/news/business/fd-tax-rules-know-before-opening-fd-fy-21-22-7888631.html
[3] H&R Block, (2021, December 31). Reporting P2P lending income correctly in your ITR. https://www.hrblock.co.in/blog/reporting-p2p-lending-income-correctly-in-your-itr/
[4] Scripbox, (2022, July 20). Income Tax Return (ITR) Filing - A Complete Guide. https://www.scripbox.com/how-to-file-income-tax-return-in-india
- In the realm of personal-finance, understanding tax obligations for income sourced from non-traditional avenues like Defi, peer-to-peer lending, and side hustles is crucial.
- Investment in fixed deposits also brings tax responsibilities, as interest earned is considered taxable income under the 'income from other sources' tax head, with taxes varying based on individual tax slabs.
- In the 2025-26 tax year, it's essential to report all personal-finance activities, including interest from fixed deposits, accurately to avoid any discrepancies and ensure compliance with finance market regulations.
