Paying rent to kin for tax relief? You may be denied tax exemptions

If you have been paying rent to your relatives, or at least showing it in your tax return, you could be denied tax exemptions under HRA.

Income tax appellate tribunal (ITAT) in Mumbai had denied a claim on house rent allowance exemption to a taxpayer who had paid rent in cash to her mother, as she was unable to give proof. However, the Ahmedabad ITAT allowed the HRA exemption claimed by a taxpayer who had paid rent to his spouse.

To make the 'best' use of income tax exemption available under HRA, some salaried employees pay rent to their family members to claim tax deductions under the house rent allowance.

"Payment of rent to a parent or spouse will not impact the eligibility to claim HRA exemption as long as the above mentioned conditions are met and the transaction is genuine." "The transaction should not be a mechanism to avoid tax," Amarpal S Chadha, partner, people advisory services at EY-India told TOI.

Tax department may soon be asking for proof to check whether the taxpayer claiming deductions under HRA is staying at the rented property.

The Income Tax department will now scrutinise receipts submitted under HRA with more diligence and may ask you to provide more proof to show that you are staying in the accommodation.

Tax authorities may soon be able to deny tax relief where house rent allowance (HRA) is claimed by fabricating bills. The assessing officer can now ask for proof of rent agreement, letter to the housing society informing about the tenancy, electricity bill, water bill etc. from those claiming tax deductions for house rent allowance.

In this year's annual budget, the Finance Minister had proposed that those who are claiming a House Rent Allowance (HRA) of more than Rs 50,000 per month will have to deduct tax at source at the rate of five per cent.

The TDS will have to be deducted on the last month of the year in which rent is paid or last month of tenancy .

From Government perspective this amendment would ensure that there are no revenue leakages on account of such rental income. This will also discourage people who were claiming the HRA deduction fraudulently quoting wrong Permanent Account Number (PAN) of the landlord. Quoting PAN of the landlord was mandatory in case the rent paid during the year was more than Rs one lakh a year.