House Rent Allowance (HRA) Claims Under Scrutiny. How To Avoid Rejection

The Mumbai tribunal said in a recent ruling that the assessing officer can now demand further proof for allowing HRA deduction.

Recent rulings from income tax tribunals on house rent allowance or HRA claims have brought the tax rebate to the fore. The Mumbai tribunal in a recent ruling said the assessing officer can now demand further proof for allowing HRA deduction.

“The judgment of Ahmedabad tribunal and recent judgement of Mumbai tribunal are not contradictory per se and have necessarily the similar import. In the ruling of Ahmedabad tribunal, the person was living with his wife and was transferring the rent amount to her bank account. As twin requirements of occupation and actual payment were satisfied, hence it was allowed,” said Sandeep Sehgal, director of tax and regulatory at Ashok Maheshwary & Associates LLP.

“The Mumbai tribunal has only imposed a stringent requirement to produce other necessary documents to prove the genuineness of the claim. Hence, people claiming the HRA exemption for rent paid to relatives are advised to maintain robust documentation to prove the actual payment, actual occupation and genuineness of transaction,” he added.

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. Tax experts say that after the tribunals’ rulings, the HRA claims will be under close scrutiny from the tax department.

Now, taxpayers who were claiming HRA exemption on the basis of fake rent receipts may find it difficult to claim the exemption, said Maneet Puri of Taxmann. Experts say that taxpayers, especially who pay rent to relatives, and claim HRA benefits could face higher scrutiny.

The Taxman executive lists out some procedures to follow:

• You should have evidence of your actual stay at residential house of your mother, father, wife etc. (viz. close relative). You can enter into a rent agreement for this purpose.
• It is difficult to substantiate rental payments made in cash. So, it’s better to pay house rent to your close relative through transfer of money in his or her bank account.
• If you are making rental payments which will be taxable in the hands of your close relative, make sure that he or she files income tax return (ITR) and shows such rental receipts in that return of income.
• It may happen that the addresses mentioned in your ration card, bank statement and return of income do not match with the recorded address of your rented premises. In that case, you will be in trouble as now the Income Tax Department may scrutinize such cases.
• You will have to ensure that your rental payments do not exceed the market value of similar property in your vicinity. The income tax officer may disallow HRA exemption in such a case.
• If you are staying in any flat of society of your relative, make sure to intimate the secretary of society about your tenancy.