Taxmen may reject fake rent receipts for HRA: Here’s how to avoid that situation

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Published: April 6, 2017 10:19:13 AM

Submitting fake house rent receipts to claim HRA benefits and lower one's tax burden may soon be a thing of the past. For, being perturbed by the rising incidence of fake HRA claims as well as influenced by a recent tribunal ruling, the Income Tax Department is all set to tighten the screws on those submitting fake rent receipts.

It may be noted that most of the private sector employers pay an allowance in the nature of HRA

Submitting fake house rent receipts to claim HRA benefits and lower one’s tax burden may soon be a thing of the past. For, being perturbed by the rising incidence of fake HRA claims as well as guided by a recent tribunal ruling, the Income Tax Department is likely to tighten the screws on those submitting fake rent receipts.

In fact, it is no secret that a large number of people produce fake or inflated rental receipts to reduce their income tax outgo. Also, sometimes “many people claim HRA by paying rent to their friends, relatives or family members. And so they do not care about taking proper rent receipts, making regular rent payments etc. So in these cases, the income tax officer may not consider it as a genuine case now and so he may disallow the HRA exemption,” says Archit Gupta, Founder & CEO, ClearTax.com.

It may be noted that most of the private sector employers pay an allowance in the nature of HRA (House Rent Allowance). This HRA is essentially paid to help the employee meet expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee at the place of duty.

Section 10(13A) of the Income Tax Act exempts any such HRA received by assessee from his employer subject to fulfillment of certain conditions:
1. Assessee should have actually rented an accommodation, and
2. He should be actually occupying said accommodation

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Further no HRA exemption is allowable if
(a) the residential accommodation occupied by the assessee is owned by him; or
(b) the assessee has not actually incurred expenditure on payment of rent in respect of the residential accommodation occupied by him.

Section 24b of the Income Tax Act allows you to claim the deduction for the interest paid on your housing loan. This deduction is restricted to Rs 2 lakh per financial year if such property is self-occupied by the assessee.

“It is many times seen that in order to reduce the tax liability and to save taxes, many employees claim HRA benefits without correctly evaluating eligibility in their particular case. Some taxpayers who are actually staying in a house owned by themselves or any of their close relatives claim the HRA benefit by showing dummy rent payment (without actually paying any rent) to their relatives. Generally these relatives fall in lower/ Nil tax bracket as compared to the taxpayer. This results in significant tax saving for the employee as he can claim the HRA or HRA & Housing loan interest both,” says Chetan Chandak, Head of Tax Research, H&R Block India.

There is nothing in the law to stop the taxpayer from renting premises from his relative and claiming the HRA benefit for such rental payment. However, this should be an actual and genuine transaction, otherwise it can lead to serious tax consequences, if the tax department catches hold of it. In a recent order passed by ITAT MUMBAI BENCH ‘H’, the tribunal disallowed assessee chartered accountant’s claim of HRA exemption based on sham rent payment entries to her aged mother. In this case the assessee claimed that she was staying in a house owned by her old aged mother so that she can take care of her ailing mother. She further claimed that she was paying her mother a monthly fixed rent so that her other siblings don’t object to her staying with her mother and as this was a transaction with her mother, she never felt any need of a formal/written agreement.

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However, the fact was she was actually staying in a house jointly owned by her with her husband, located at only 5-minute walking distance from her mother’s house. On a deeper scrutiny of the case, the assessee was unable to prove that she was actually staying in a rented house owned by her mother and was even unable to prove that she actually paid any rent in cash to her mother as her bank statement hardly had any cash withdrawals.
So, “based on the order passed in this case, it is clear that the taxman is looking to catch hold of these types of sham/dummy transactions and relevant exemption claims. Going forward, the department would definitely like to probe into the genuineness of such transactions,” says Chandak.

So all the assesses who have genuine HRA exemption claims should ensure that they have sufficient transaction trail in the form of
1. Leave and License Agreement with the landlord (preferably a registered one),
2. Proof of rent payment (bank debits or bank entries for cash withdrawals)
3. In case you have rented an apartment from your relative, then he/she reports such rental income in the tax returns

“This transaction trail will help the assessee in establishing the fairness of his claim,” says Chandak.

Moreover, if anyone wants to claim HRA, he/she must keep the following points in mind in order to avoid any disallowance by the Income Tax Department:

1. Existence of a Rent Agreement: There should be a signed agreement between the tenant (person claiming HRA) and the landlord. “Even in case where the rent is being made to the family members or relatives, say you are paying rent to your father, there should be a signed agreement between you and your father,” says Gupta.

2. Make Payments to the Landlord: Even if you are paying rent to your family members, you must make the payments monthly or at regular intervals as per the terms of the agreement. Preferably, payments should be made in modes other than cash as it becomes easy to show the proof of payment.

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3. Reside in the rented house: The person should physically reside in the house for which he is claiming the HRA. “If it is established that he is not residing and his friends / relatives only are residing there, the HRA exemption may be withdrawn,” informs Gupta.

4. Rent payments must be included in the income of Landlord: If you are paying rent to your family members, say your mother, then rental income should be included in her income tax return.

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