Fake Rent Receipts For Tax Benefit Will Be Harder To Push Now

The Income Tax Department is likely to increase scrutiny of rent receipts submitted by taxpayers for claiming deduction under house rent allowance or HRA. This follows a ruling from Mumbai Income Tax Tribunal in a case related to claiming of HRA deduction. The tribunal in a recent ruling said the assessing officer can now demand further proof for allowing HRA deduction. HRA forms a big component of an employee’s salary. Salaried individuals who live on rent can claim HRA to lower taxes. It is partially exempted from taxes. However, if the individual does not live in a rented accommodation, HRA is fully taxable.

“The recent judgement of Mumbai Tribunal has clearly spelt out that only rent receipts in itself shall not be treated as conclusive document for claiming the exemption for house rent allowance and the tax authorities may ask for details to vouch that the claim for rent paid is genuine and reasonable,” said Sandeep Sehgal, director-tax and regulatory at Ashok Maheshwary & Associates LLP.

“HRA exemption usually forms a large chunk of tax saving avenue for salaried class people. Such a judgement will put huge onus on these people to justify the claim and the some employers may henceforth exercise greater scrutiny while allowing such claim for deducting TDS (tax deducted at source) from their salaries,” he added.

The tribunal said the assessing officer can now demand more proof such as leave and license agreement, letter to society intimating about assessee’s tenancy, payment through bank, cash payments backed with known sources, electricity bill payments through cheque and water bill payments through cheques.

Under Section 10(13A) of the Income Tax Act, the deduction on HRA is the lowest of the following:

Actual HRA received from the employer
50 per cent of (basic salary + dearness allowance) for those living in metro cities (40 per cent for non-metros)
Actual rent paid less 10 per cent of salary

Last year, the Income Tax Department had notified a new form – Form 12BB – for standardising the process for claiming deductions, including HRA. Employees have to furnish evidence of claims and tax-saving investments to their employers through Form 12BB. The practice of furnishing details of deductions to employees is nothing new. But earlier, there was no standard format. Tax experts say that now with a standard format in place, it will help in better documentation for both employees and employers.

Employees are required to furnish evidence for claiming house rent allowance (HRA) if it exceeds Rs. 1 lakh in an assessment year. The details include name, address and PAN of the landlord where the aggregate rent paid exceeds Rs. 1 lakh. The tax authorities in turn through the landlord’s PAN can also verify whether the rent received by the landlord has been duly disclosed in his/her tax return.