1. How to claim tax exemption on HRA: 3 brief points to ponder

How to claim tax exemption on HRA: 3 brief points to ponder

The employer is responsible for correct determination of income tax liability of their employees, deduct appropriate amount of income tax and deposit it with the government.

Published: April 18, 2017 5:39 AM
An important aspect of this perception is that the entire income of salaried employees is subject to deduction of tax at source by employer. (FE archive)

THE GENERALPERCEPTION is that salaried employees pay taxes honestly. This has also been acknowledged by various government officials in the past. An important aspect of this perception is that the entire income of salaried employees is subject to deduction of tax at source by employer. In other words, the employer is responsible for correct determination of income tax liability of their employees, deduct appropriate amount of income tax and deposit it with the government.

Tax-free allowances Whiledeterminingtaxableincomeunder the head ‘salary’, certain deductions are allowed such as house rent allowance, leave travel allowance, medical allowance, etc., subject to furnishing of bills or payment receipts to authenticate that the expenditure has been actually incurred by the employee towards such allowance. Very often these allowances are used as measures to escape tax liability even bythose employees who do not really incur such expenses.

Generally, salary packages are also structured by employers in a manner, to enable their employees get maximum tax benefits of such allowances. Case of House Rent Allowance House RentAllowance (HRA) can be considered to be tax-free in the hands of an employee (to the extent of 50% of basic salary), subject to furnishing of supporting documents to evidence actual payment of rent by employee forhis residence. For claiming this exemption,as a general practice, employees submit rent receipts, PAN number of landlord and copy of lease agreement to their employers, based on which, employers consider HRA paid to such employees as ‘exempt’, without generally verifying the genuineness of these documents.

However, a recent case before IncomeTax Appellate Tribunal, revealed various lacunae in practices being followed to claim exemption of allowances, without corresponding genuine expenditure. In this case, an employee claimed exemption in respect of HRA, based on rent receipts received from her mother. Based on enquiry made by tax officer,the tribunal held that there was no evidence to support that house rent was actually paid by a taxpayer to claim such exemption. Exemption from HRA could not be claimed merely on basis of rent receipts, without supporting corroborative evidence such as leave and license agreement, evidence of payment through bank account/in cash, electricity bill,water bill, etc.

It was also held that considering overall facts of the case and conduct of assessee, such as payment of rent to mother, deduction of home-loan interest claimed by assessee for another self-occupied property in same vicinity, etc., claim of assessee could not be said to be genuine. This case has raised serious doubts in minds of tax authorities and employers whether claims made by employees for tax exemption for various allowances, are genuine or not? Way ahead In case employees are claiming exemption for any such allowances, it is important for them to support such claim with appropriate supporting documentation, such as formal lease agreement in case of HRA, payment preferably made through bank, cash payments supported by withdrawals/known sources, utility bill payments, etc.

Employers are also required to be more careful in examining documents submitted by employees in support of their claim.The government should also consider allowing a standard deduction from salary income for all salaried employees instead of such allowances so that individuals do not make incorrect claims.

Shailesh Kumar, Director, Direct taxation, Nangia & Co.

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  1. S
    Siddharth Jhawar
    Apr 29, 2017 at 5:44 pm
    There are certain landlord who doesn't wish to receive rent by bank and also not willing to provide rent receipts. While employees actually incur the expense but he is left with no option but to prepare some do ents for rent payment. What is your advise for such employees?
    Reply

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