In April 2017, an income tax tribunal ruling on rent receipts grabbed many eyeballs. This is because it rejected the HRA exemption claimed by a salaried individual for the rent paid to her mother.
The tribunal rejected the claim on the grounds that there is no proof to substantiate that payment of rent has actually happened.
Here are some list of documents and dos and don'ts which you must remember while claiming tax exemption of HRA from your employer or while filing income tax returns (ITR).
1. You have must have a valid rent agreement. The rent agreement must mention all the relevant details such as amount of monthly rent, time period of rent agreement, any utility bills to be paid by you etc. The agreement must mention the premises rented by you, other charges such as utility or property tax if payable by you.
2. In case of a shared accommodation, then along with the above mentioned details in the rent agreement, it should also mention number of tenants co¬sharing the flat, ratio in which rent and how utility bills are to be divided.
3. Make your rent payments preferably via banking channels instead of cash. Using banking channels helps to provide an electronic trail of money for the transactions occurred.
4. You must ask for receipt for the rent paid every month irrespective of the channel used for making payments. It is mandatory to furnish rent receipts to the employer for claiming HRA exemption for the monthly rent paid more than Rs. 3000 per month.
5. In addition to rent receipts, if your payment exceeds Rs. 1 lakh annually, then it is mandatory for you to provide the PAN of your landlord to your employer to avail the full benefit of HRA exemption. It helps you to lower your TDS deduction
6. In case PAN is not available, then your landlord must be willing to give you a declaration to this effect. Confirm this before taking house on rent so that you are able to avail the benefit of HRA exemption from your employer. Along with the declaration, you also need to obtain 'Form 60' dully filled by your landlord, in case PAN is not available. You need to submit these to your employer.
7. If you do not provide PAN of your landlord then, you cannot claim tax exemption for HRA from your employer while withholding TDS on salary. While Income Tax Act does not restrict the employee from claiming tax exemption for HRA while filing returns but there will be mismatch in the salary income reported in the Form 26AS by your employer vis¬à¬vis that reported by you in your return. This may prompt the department to send a communication seeking response regarding the mis¬match.
8. If a separate amount is mentioned on the rent agreement and difference is paid in cash. exemption will be calculated only on the basis of rent receipt furnished by employee mentioning the amount paid. Any amount paid over and above the rent receipt shall not be considered for the purpose of exemption by employer.
9. You must physically reside in the house mentioned by you while claiming HRA exemption. In case your parents are landlord, make sure that they include the rental income too while filing their returns
10. Remember to deduct tax at source (TDS) @ 5%, from the rent paid to your landlord if you are paying rent above Rs. 50,000 per month. Interest at 1% per month is levied in case you forgot to deduct it and 1.5% per month where TDS is deducted but not deposited. It would also attract the penalty of Rs 200 per day for the period of delay.
You can claim tax exemption up to 100% of the actual HRA received provided all the conditions to claim relief have been satisfied by you.
The deduction for House Rent Allowance (HRA), under section 10(13A), is generally availed by the employee through the payroll by providing requisite supporting documents and also, meeting the necessary conditions. To claim HRA, you need to have relevant documents with you. The supporting documents for this purpose as mentioned earlier would be rent agreement, rent receipts. If the amount of rent exceeds Rs 1 lakh per annum the PAN of the landlord is also necessary. In case the landlord does not have a PAN, a declaration to this effect should be obtained from him, along with his name and address details.
An employee generally has to submit all relevant documents with their company Human Resources department. However, the tax authorities do not require an employee to submit documents to them. While supporting documents are not required to be submitted with the tax return, it is necessary to ensure the same is readily available in case there is a query from the tax office/Central Processing Centre (CPC)
You should not file wrong information in ITR forms otherwise you may have to pay a penalty. Vasudevan said that a new provision introduced vide Finance Act, 2016, brought in the concepts of underreporting of income and misreporting of income. “Mis-reporting of income has been defined to mean, inter alia, misrepresentation or suppression of facts or claim of expenditure not substantiated by any evidence. Therefore cases involving the wrong claim of exemption HRA by furnishing false rent receipts, where rent cannot be justified would clearly attract penalty at the rate of 200% of the amount of tax payable.
(Shubham is a Chartered Accountant and MBA (Finance). She is on the forum of “Economic Times” experts on Taxation. She specialises in Individual Taxation and Taxation of Freelancers & Small businesses. She can be reached on firstname.lastname@example.org for answering your tax related questions.)
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