Most salaried individuals have House Rent Allowance (HRA) as part of their salary structure. To save income tax, many people claim HRA tax exemption for living in rental accommodation during the financial year. As per a Times of India report, the Income Tax Department has unearthed an HRA fraud involving the usage of illegal Permanent Account Numbers (PAN). The Income Tax Department has detected 8000-10,000 high-value cases with amounts exceeding Rs 10 lakh or more in some cases.
This may lead to increased scrutiny of HRA claims, especially for high-value HRA claim amounts. Barring a few exceptions, the income tax department can reopen old income tax returns (ITRs) up to four years from the year of filing it. During this period, the taxpayers are expected to keep records of the deductions and exemptions claimed while filing their ITR.
Now, if you want to ensure that your genuine HRA tax exemption is accepted by the tax department while filing your income tax return (ITR), then you must keep certain proofs handy.
Here is a list of proofs to keep handy and things you must do to ensure that your HRA tax exemption is not rejected by the tax man.
1. Valid rent agreement: As a tenant, ensure that you have a valid rent agreement with your landlord. Further, the rent agreement must have certain clauses to ensure that it is compliant with income tax laws. For instance, if the monthly rent exceeds Rs 50,000, then TDS must be deducted from the rent. The rent agreement should specify if TDS is applicable, who will deduct it and how it will be deducted.
Apart from this, the rent agreement must have basic details of both, the tenant and landlord. Tax experts advise that it is a good practice to add PAN and Aadhaar of the tenant and landlord.
Also Read: How rent agreement should look like if HRA tax exemption is claimed
2. Rent receipts: Apart from a valid rent agreement, an individual must also collect rent receipts for the rent payment made. According to tax experts, a valid rent agreement may not be sufficient proof to claim HRA tax exemption. The rent receipts serve as evidence that the salaried employee has actually paid the rent amount during the financial year. The rent receipts must be collected even if rent is paid via electronic methods like net banking.
Further, an employer can demand proof of both, rent agreement as well as rent receipts, to deduct TDS on salary. If one document is missing, then higher tax can be deducted from your salary income by your employer.
Also Read: Are rent receipts, rent agreement mandatory for HRA tax exemptions?
3. Pay rent via banking channels: Chartered accountants say that rent should be paid via electronic channels such as Net banking, UPI etc. instead of cash. The rent payment made via banking channels keeps a record of the transactions. If the income tax department asks, the bank statement can serve as proof for the rent payment made.
Income tax rules restrict cash payments of Rs 2 lakh and above under Section 269ST of the Income-tax Act, 1961. According to tax experts, the payment of rent receipts in cash more than Rs 2 lakh can invite penalty under Section 271DA.
4. PAN of the landlord: If you are claiming HRA tax exemption from your employer, then you must mandatorily give your landlord’s PAN if rent paid exceeds Rs 1 lakh in a financial year. The income tax rules allow an individual to claim HRA tax exemption while filing ITR if the same is not claimed through the employer. Though the income tax department does not ask for landlord PAN while filing ITR, however, it is advisable to keep the copy of the PAN of the landlord in case the tax department asks for it later.
5. Paying rent to family members: Income tax laws do not restrict paying rent to family members. However, chartered accountants advise that individuals should make and keep the documents required even when the rent is paid to the family member or else the income tax department can reject the HRA tax exemption.
Apart from this, the individual should ask the family member to show the rent received as income in their tax return, if ITR filing is mandatory.
Also Read: Can you claim HRA tax exemption for rent paid to wife?
