23 Apr 2017 13:53 IST

HRA claims: Honesty is the best policy

Recent guidelines issued by the government have tightened the scrutiny process

Providing fake rent receipts to claim house rent allowance (HRA) benefits is a widely prevalent practice. But going by recent developments, it’s best to think twice before one does this as one could come under the scanner of the Income Tax Department.

Recent guidelines issued by the Mumbai Income Tax Appellate Tribunal have reinforced the need to tighten the scrutiny on HRA claims. Here we take a look at what constitutes HRA and what claimants need to do.

Tax computation

HRA is a widely known component of the salary structure. Individuals can get tax exemption on this allowance to some extent. The amount eligible for claiming tax exemption is calculated as the lowest of the following three: the entire amount received as HRA in a financial year by the individual; actual rent paid minus 10 per cent of the salary of the individual; 50 per cent of the salary if you live in a metro city or 40 per cent of the salary for individuals in non-metro cities.. The salary here is the basic salary plus the dearness allowance. The accompanying table explains the calculations.

The supportive documents

Currently, it is enough if the individual gives the rental receipts to the employer to claim tax exemption on the HRA. This makes it easy to produce fake rent receipts. Parizad Sirwalla, partner and head, Global Mobility Services, KPMG in India, says “The recent judicial precedent has re-emphasised the need for maintaining robust underlying documentation in respect of claiming tax exemption in respect of HRA. It has also highlighted the aspect that HRA exemptions can be claimed only for genuine rental transactions.”

Neetu Brahma, Director, Nangia & Co, says, “When you claim for HRA exemption, there are two things that you ought to establish. One is that you had actually made the payment and the second is that you actually reside in the premise for which you pay the rent.”

As a genuine rent payer, you have to maintain documents that prove that you stay in those premises and are actually paid the rent. As the government is keen on moving towards cashless transactions, an online transfer of the rent to the landlord or payment by cheque could be the best way to prove that you have actually paid the rent.

If your landlord accepts only cash payments, do not worry. Make it a habit to withdraw an amount equivalent to the rent from your account every month and get a receipt stating that the rent is paid in cash. In this case, your account statement showing the rental outflow every month can be used as proof. Secondly, to prove that you have lived in the rented premises, utility bills like electricity bills, gas bills, etc., can be kept safely for record purposes.

If you have the above-mentioned documents, then you do not have to worry about coming under the tax department’s scanner. Also, experts believe that not all HRA claims will come under scrutiny. “The cases that are most likely to come under scrutiny are when both exemption for HRA and deduction on account of home loan are claimed simultaneously in the income tax return”, says Neetu.

Points to note

The Budget has made some changes to tighten the screws on this front. If you pay more than ₹50,000 per month as rent, you have to deduct 5 per cent tax at source. You will then have to remit the tax deducted at source to I-T Department once a year from your side. This is effective June 1, 2017. Also, it is mandatory to mention the landlord’s PAN number in the receipt if the rent exceeds ₹1 lakh per annum. This reduces the scope for making fake claims as well.

(The article first appeared in The Hindu BusinessLine.)