Income Tax Dept detects HRA fraud; here’s how to submit rent receipts as per the norms

The Income Tax Department has detected a fraud involving salaried employees who used unauthorised permanent account numbers (PANs) to claim deductions under the House Rent Allowance (HRA), a report said on Saturday, March 30.

The HRA is a component within the salary, through which an employee can claim deduction in the taxable income. The allowance is capped at 50% of the basic pay if one is living in a metro city, and 40% of the basic pay in case of non-metro cities. The deduction claim is required to be backed by rent receipts – an admissible evidence of one actually paying the rent.

In the rent receipt, the employee has to mandatorily add the PAN details of the person to whom the rent is being paid.

According to the Times of India, the I-T Department has detected 8,000-10,000 high-value cases, where employees have allegedly used unauthorised PANs to claim deductions of ₹10 lakh or more.

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The HRA fraud came under the radar after the taxation body detected alleged rent receipts of ₹1 crore submitted by an individual, the newspaper said. In such a case, the person who has received the rent is liable to pay a tax on the high rental income.

Upon inquiry, the person whose PAN was used told the I-T officials that he had no knowledge about the matter, the report said. A further probe revealed that the person had indeed not received any rent, it added.

This reportedly prompted the taxation body to launch an investigation to find out whether employees are using unauthorised PANs on a large-scale to fraudulently claim tax deductions.

Tax officials who spoke to the publication said the fault in such cases lies with the employees alone, and that the employer cannot be held liable.

How to submit rent receipts as per the rules to claim HRA deduction?

As per the norms, an employee has to genuinely pay the rent and claim deduction for the same, if the salary has an HRA component. For that, one needs to fill the rent receipt and attach it along with his tax returns.

If one is claiming the HRA deductions on a monthly basis, then the rent receipts are required to be submitted to the employer. The employer in turn shares it with the taxation authorities.

In the rent receipt, one is required to add the address for the house where he/she is staying as a tenant, along with the PAN card details of the landlord.

Although rent can be paid in the form of cash, tax experts recommend that it should be paid electronically or through cheque, in order to demonstrate the genuineness of the transaction.

Notably, tax deducted at source (TDS) is applicable only on monthly rent of ₹50,000 and above, or annual rent of ₹6 lakh or more.

How to pay rent to parents to claim HRA deduction?

A person can pay rent to his parents, if they are the owners of the house, to claim deductions under HRA. The process to claim such deductions is the same as explained above – one needs to submit the monthly rent receipts, along with the address of the house and the PAN details of the parent in whose name the residential property is registered.

The rent can be paid in the form of cash, but tax experts strongly suggest that the rent paid to parents should be in the form of cheque or electronic transfer to avoid coming under the scrutiny of I-T officials.

What is the penalty for submitting fake HRA receipts?

The employee who is caught submitting fake rent receipts is liable to pay a penalty. Claiming HRA deductions by showing fraudulently inflated rent receipts amounts to misreporting of income under the Income Tax Act, 1961.

As per Section 270A of the I-T Act, 1961, a penalty of 50% of the tax applicable can be imposed if an assessee has under-reported the income. The provision of the law also allows the assessing officer to slap a penalty of up to 200% of the taxable income if one has shown fake documentary evidence, such as a fraudulent rent receipt, to claim deductions.