Why you need to ensure that your HRA claims are genuine

Updated: April 6, 2017 9:36:46 PM

A common tax exemption claimed by salaried taxpayers, who live in rented premises, is with respect to House Rent Allowance (HRA) received by them from their employers.

The onus of proving that the rental arrangement is at arms-length and the underlying conditions for exemption are complied with, rests with the taxpayer. (Reuters)

By  Parizad Sirwalla

A common tax exemption claimed by salaried taxpayers, who live in rented premises, is with respect to House Rent Allowance (HRA) received by them from their employers. The onus of proving that the rental arrangement is at arms-length and the underlying conditions for exemption are complied with, rests with the taxpayer. Failing this, the Tax authorities may reject the claim, as held in a recent judicial development. Let us have a closer look at the provisions in this regard and how it impacts us.

Existing provisions

As per the provisions of the Income-Tax Act, 1961, an exemption for HRA is available to an employee, in case he has actually incurred expenditure on payment of rent for residential accommodation occupied by him, within the prescribed limits. The exemption is not available if such accommodation is owned by the employee or he has not actually paid the rent.

As taxes on salary income are required to be withheld by the employer at source, onus is cast on the employer to satisfy himself with respect to compliance with above provisions, before allowing HRA exemption. The employer is obliged to collect the necessary evidence/proof with respect to the claims and rent payments, along with details in the recently notified Form 12BB, before allowing such exemption. It has been provided that where annual rental exceeds Rs 1,00, 000 per annum, Permanent Account Number (PAN) of the landlord also needs to be reported to the employer. Also, where HRA is within Rs 3,000 per month, no rent receipts need to be provided to the employer, however the same may need to be produced during regular assessment of the employee.

What has changed

While there has been no change in the law, a recent judicial precedent has re-emphasized the need for vigilance with respect to verifying HRA claim, basis underlying documentation, especially where such transactions are between relatives. In a decision of the Income-Tax Appellate Tribunal (ITAT) Mumbai, the Tribunal rejected HRA exemption claimed by the assesse, towards rental payments to her mother, considering it a sham transaction. The same was basis specific collective findings in the case such as assesse not actually residing in the rented house, claim of deductions towards self -occupied property, absence of a formal lease agreement, rental payments in cash with no corresponding drawings from bank, non-filing of return by mother, proximity of rented house to own accommodation etc.

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As currently no documents are specifically coded in law with respect to verification of such claims, the said ruling may provide precedent value to both the employers and the tax authorities, as to the documents which should be obtained from the employee.

It may be noted that there has been another ITAT Ahmedabad ruling, in which rent paid to wife was allowed basis the fulfillment of conditions and maintenance of specified documents. Hence, the evaluation of the genuinity of the claim is very fact and case specific.

What the tax department plans

It is evident that the tax department is seeking to uncover all sham transactions, where HRA deductions are claimed by the assesse towards rent payments which are not genuine. With improved technology and stricter reporting norms, the tax authorities are better geared to identify such transactions. It may be noted that the Finance Act 2017 already provides that individuals paying rent to a resident exceeding Rs 50,000 per month are required to deduct tax at source at the rate of 5 percent, thereby getting these transactions under the TDS net.

Way forward

The genuine rent payers should not be impacted, as long as they can provide the necessary documentation.

At the employer level, the employers should endeavor to continue to collect the necessary documents from employees for verification, to avoid any consequences relating to under-withholding As part of their policy, it may be prudent to seek documents such as duly executed lease agreements and rent receipts, evidence of payment transfers, PAN and other details of the landlord, match the address of the employee with the lease deed, discourage cash rental payments. Additional documents may be insisted where both HRA exemption and deduction for self- occupied property is being claimed and where rental payments are being made to relatives.

(The author is Partner and Head, Global Mobility Services, Tax, KPMG in India)

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