House Rent Allowance: Follow Correct Procedure Amid Increased Scrutiny

The Income Tax Department has cracked down on employees wrongly claiming house-rent-allowance deduction as multiple cases of fraud have come to light.

This means increased scrutiny and verification of the details that enables employees to claim the benefit. The first point to follow is that there has to be a genuine transaction when the HRA is claimed, and this should not be present only on paper and used as a means to save tax. Along with this, there are also other details that one must keep a watch on.

Here are some of the things that employees should follow.

One of the points that has emerged from the recent crackdown by the income tax authorities is that it's not just those claiming the HRA who need to be alert about the situation. Others, too, need to be aware that they could be the victim of a fraud.

There have been many cases where the permanent account number of someone was used wrongly to show that they received rent from multiple people who in turn claimed the HRA benefit. When someone claims that they have paid rent to a person, then the receiver has to show it as income.

The matter came to light when the person whose PAN was used got a notice from the tax department and this was replied to saying that there is no rent receivable as there is no property that is given out on rent. This is the reason why every person must look carefully at the details regarding their income and any communication that comes from the tax department to prevent being the victim of any fraud.

The most important part of the claiming of the HRA benefit is that the PAN of the landlord or the person receiving the rent has to be mentioned in the details that are submitted to the employer. This is crucial as the verification of the details by the tax department will hit a roadblock if a wrong PAN is quoted.

The PAN, which receives the rent, has to show this as income so if the number itself is wrong, then the person who has claimed the benefit could get a notice from the tax department. This could lead to the benefit being disallowed if the correct number is not submitted and rectifying it later can lead to a lot of effort. 

The amount that is actually paid as rent has to be shown for the purpose of calculation of the HRA. This is essential to ensure that the correct amount is claimed as a deduction.

In several cases, it has been found that the person claiming the HRA did not show the correct amount that was paid. This can lead to a mismatch, which can end up with a notice from the tax department.

There is also the provision of a tax deduction at source if the amount of the rent exceeds Rs 50,000 a month. So, this also needs to be followed. Otherwise, in the rush to claim a higher deduction, the person giving the rent could end up in default on another front.

The amount that is shown in the rent receipt and then claimed for the benefit of the HRA has to be actually paid to the owner of the property. It cannot be said that the receiver is a relative or a family member and hence, the amount was adjusted at some other place.

Similarly, it is not very wise to pay such amounts in cash and would be better if there is a bank transfer that takes place so that there is a clear trail that is established. This will make it easier to prove that the actual payment of rent was made in case of any query from the tax department.

Arnav Pandya is the founder of Moneyeduschool.