Rent receipts aren't enough to prove House Rent Allowance claim

When submitting Housing Rent Allowance (HRA) receipts claiming that you pay rent to a close relative like parents, siblings or spouse; ensure that you have supporting documents to substantiate it. You need to have a leave license agreement, and there needs to be money trail for the rent paid.

A recent Income Tax Appellate Tribunal (ITAT), Mumbai, judgment has opened a can of worms. A taxpayer claimed Rs 2.52 lakh HRA stating that she gives rent to her mother. When asked to submit supporting documents such as rent agreement and bank statement showing the transfer of funds, she could not, and the assessee lost the case.

“An individual needs to satisfy just two conditions when claiming HRA. One, he is actually occupying the property. Two, the landlord actually receives the rent,” says Suresh Surana, founder, RSM Astute Consulting Group. It is mandatory for the employee to report the Pan Card of the landlord to the employer if the rent paid is more than Rs 1 lakh annually, or if it exceeds Rs 8,333 per month.

If you genuinely pay rent to a close relative, the first step is to ensure that you have a notarised leave and license agreement in place. If the house is in a society that requires the landlord to be informed it about letting out the property, follow the rule. Make sure there is a record for transfer of funds and therefore use a banking channel to pay money to the property owner. If you pay in cash, ATM withdrawals should reflect that the amount taken out is equal to or higher than the rent you pay.

In the recent case mentioned above, the income tax department even checked details such as who pays the electricity and water bills. “The assessing officer would not usually ask for such information. But in this case, the assessee wasn’t able to establish her claim and therefore further details were sought. Apart from the agreement and money trail, if the recipient files tax returns and declares the rent received, it would further strengthen your case,” says Naveen Wadhwa, deputy general manager (R&D) at Taxman.com. If you pay rent to your parents, whose income is not taxable, it would still be a good idea that they file returns and declare the rental income. They also get 30 per cent deduction of the rent received towards the maintenance of the property.

A few also exaggerate the rent they pay, which again can cause problems. Surana says that the rent should reflect the ongoing rates in the area. With the tax department introducing the Form 12BB last financial year, employers could also be made responsible for wrong submissions. If an individual exaggerates the rent and tax department hauls up the employer, the latter would take a strict action against the employee. In the new form, the employee has to mention the name of the landlord, his address and PAN number (if rent paid is over Rs 1 lakh).

The recent ITAT Mumbai case was selected in a random scrutiny, and the same can happen with you. Every year, the tax department picks up around three per cent of the returns for scrutiny based on certain triggers such as income above a particular threshold, a major transaction shown in the returns and so on. The assessment is made under section 143(3) of the Income Tax Act, where the assessee is asked to substantiate the income, expenses, deductions, losses, exemptions, etc, claimed in the return by producing relevant evidence.

The assessing officer has the right to conduct enquiries as deemed fit and even call for information from third parties. If any omissions, discrepancies, inaccuracies, etc come to light, the assessing officer makes an assessment of the taxable income and raise additional tax demand. If there’s deliberate concealment, the individual would also need to pay a penalty of 200 per cent of the tax payable on the misreported income.