If you have made certain claims to get an income tax deduction or exemption while filing your income tax return, then you need to keep documentary evidence of it as the income tax department may ask for it. There were media reports which indicated that the income tax department was running a special drive to identify fake HRA claims from previous years. However, the Central Board of Direct Taxes (CBDT) recently clarified that there was no special drive to re-open cases concerning mismatch of data relating to House Rent Allowance (HRA).
“There is no special drive to re-open cases of mismatch, and media reports alleging that large-scale re-opening is being undertaken by the CBDT are completely misplaced. At the outset, it is stated that any apprehensions about retrospective taxation on these matters and re-opening of cases on issues pertaining to HRA claims is completely baseless. Data analysis was carried out in some high-value cases of mismatch between the rent paid by the employee and receipt of rent by the recipient for the FY 2020-21,” said CBDT in a press release dated April 8, 2024.
However, this does not mean that you can live worry-free in case there is a mismatch between the rent paid by you and the receipt of rent by the landlord and there is a situation of possible tax evasion.
According to S. Sriram, Partner at Lakshmikumaran & Sridharan Attorneys (LKS), “The communication (April 8, 2024) from the CBDT is only a press release. It is not a statutory circular which would bind them. Wherever the Income-tax Authorities find that there is escapement of income, they are bound to examine them and bring the correct sums to tax.”
Which taxpayers need to worry about income tax department catching?
Those taxpayers who knowingly or unknowingly fall into the category of false HRA claims need to worry about the income tax department sending them a tax evasion notice.For example: an individual used a false rent agreement and receipts to claim false HRA; in this case the individual knowingly tried to evade tax.
Mihir Tanna, associate director-direct tax, S.K Patodia LLP shares his experience about how a tenant got into trouble with the tax department unknowingly due to a false HRA claim even though he genuinely claimed it.
“Tenants must be prepared for a possible situation where the landlord denies receiving any rent payment from the employee and this in turn will make the employee’s HRA claim void and put him in trouble. Income tax department may possibly send him a notice for this issue at the end. In our experience we have seen landlords who once accepted cash rental payments from tenants and turned their back on the tenant(s) the moment something tax related issue(s) came up. What landlords also must understand is that the income tax department can also catch them for tax evasion even if they have taken rental income in cash and not declared this income in their ITR. The tenant will also get into problems because of this, as the income tax department will think the tenant claimed a false HRA,” says Tanna.
Since it is mandatory to give PAN details of the landlord in cases where the annual rent exceeds Rs 1 lakh, experts say that using this data the income tax department can track the rental income of the landlord and HRA claim by the employees. This holds true both for the taxpayers who have HRA in their salary and those who do not get it and hence, claim HRA directly at the time of filing of ITR.
“The examination by the Income-tax Department can cover both cases of employees claiming HRA exemption through their employer, as well as those claiming exemption in their ITR. It can also include data from people claiming rent as a business expense, as well as people deducting tax under section 194IA, without claiming any tax exemption,” says S. Sriram.
For FY 2021-22 (AY 2022-23), the deadline for filing an updated income tax return (ITR-U) is March 31, 2025. According to Sujit Bangar, founder, TaxBuddy, a tax filing assistance company, “You are advised to file ITR-U if you believe there is a discrepancy in the HRA allowance claimed by you to avoid scrutiny.”
“Those individuals who have a large difference between rent paid and claimed, or those who claimed HRA directly during ITR filing without submitting HRA proof to their employers. Further individuals who have claimed a high HRA amount at the time of filing of ITR, and proper documents were either not submitted to their employer or proper rent agreement or rent receipts were not maintained,” said Bangar.
When will the income-tax dept catch you and in which cases?
Experts say that there is nothing to stop the income tax department from catching you if it is a question of tax evasion.
However, there are statutory limitations that prevent the tax department from pursuing old cases. Sriram says, “As per the prevailing law, no reopening of old cases under section 149 is permissible beyond 3 years from the end of the assessment year, unless the income that has escaped assessment is more than Rs 50 lakh. For FY 2019-20 (corresponding to Assessment Year 2020-21), the 3 years period ended on 31st March 2024.”
“So, this means as of today, notices can be issued for FY 2020-21 and onwards where the income escaping assessment is less than Rs 50 Lakh,” Sriram further added.
“However, if the potential tax evasion amount is at least Rs 50 lakh, a notice can be issued beyond three years but within 10 years from the end of the relevant assessment year,” says Tanna.
The next question is if the tax department is adamant about catching potential tax evaders who may be using HRA as a tool to evade tax and if so then which cases would they pursue? As per CA Sandeep Agrawal, co-founder, TeamLease Regtech, a regulatory and legal software solutions company, “The objective of the e-verification was to alert tax filers with rent and HRA mismatches. There are possibilities that CBDT may initiate tax recovery proceedings for cases with significant mismatches instead of taking actions for all mismatch cases considering the tax recovery vis-a-vis the volume of cases to be handled post issuance of recovery notices.”
Which taxpayers need not worry about the income tax department catching them?
According to Tanna, those taxpayers need not worry about HRA rent mismatch if they have claimed HRA as per their Form 16 and the receiver of this rent (landlord) offered this exact income in their ITR.
“Sometimes, due to certain issues, employees can not submit documents supporting HRA claims and claim HRA in ITR. It may result in notice from income tax for verification of claim. This is not an income tax notice and if the employee can verify his HRA claim with proof, nothing will happen,” says Tanna.
