News has circulated that the income tax department is cracking down on thousands of taxpayers who have falsely claimed House Rent Allowance (HRA) deductions on their income tax returns. In a recent case, it was found that some employees had been using the PAN number of another person, to claim HRA deductions. However, investigations revealed that these person neither rented out any property nor received any rent from the employee. Thousands of such cases have emerged where employees have solely used on someone else’s PAN number to claim HRA deductions.
Let’s discuss how this HRA fraud happens:
According to income tax laws, when the rent amount exceeds Rs 1 lakh, employees are required to submit the PAN of their landlord. However, if the rent amount is less than Rs 1 lakh, employees aren’t obligated to provide the landlord’s PAN. Seizing this opportunity, some employees falsely claim HRA benefits by reporting rent payments of up to Rs 1 lakh, even without renting any property. Since PAN submission isn’t mandatory in these cases, employers calculate HRA based on the Rs 1 lakh limit. Consequently, employees enjoy HRA deductions for a non-existent rent amount, although this isn’t permissible, leading to potential income tax liabilities.
When rent payments exceed Rs 1 lakh, employees must furnish the landlord’s PAN to their employer. However, instances have emerged where employees use someone else’s PAN without actually renting any property or possessing a rental agreement or receipts. Shockingly, the individuals whose PANs are misused often remain unaware, only to be later confronted with income tax notices due to mismatches or non-filing of income tax returns. Income tax data inaccurately suggests rental income earned by these individuals, despite them not owning any immovable property.
These cases pose legal challenges for landlords, who find themselves trapped in income tax notices because their PANs were submitted by employers in TDS returns, falsely indicating rental income. In some instances, employees vacate properties after a few months without updating PAN details for the new landlord. Consequently, rent payments made to the previous landlord continue to reflect erroneously in records, creating legal discrepancies.
Here’s how HRA can be claimed according to income tax laws:
When an employee rents a property, the rent paid can be claimed as a deduction, subject to the calculation of HRA. Below are the details of HRA calculation and the amount eligible for deduction under Section 10(13) in the income tax return.
In India, the calculation of House Rent Allowance (HRA) for tax purposes depends on several factors, including the actual amount of HRA received, the salary of the individual, and the rent paid for the accommodation. The Income Tax Act provides rules and guidelines for determining the amount of HRA exempt from taxes. The least of the following amounts is considered for tax exemption:
- Actual HRA received from the employer.
- 50% of the salary if the individual resides in a metro city or 40% of the salary if residing in a non-metro city.
- Actual rent paid minus 10% of the salary.
Here, “salary” includes basic salary, dearness allowance and any commission received on the basis of sales turnover.
The term “salary” for HRA calculation does not include any other allowances or perquisites.
There have been several judgments favoring taxpayers, allowing them to claim HRA deductions for rent paid to their parents or siblings, provided they maintain proper records such as rent agreements and receipts. However, it’s important to exercise caution while utilizing the HRA deduction. While it’s a valuable tool for employees to save on income tax legitimately, but some taxpayers misuse it by falsely claiming deductions for rent they haven’t paid.
