Employees receiving a fixed salary and residing in rented accommodations have the option to avail of a deduction against the House Rent Allowance (HRA) provided by their employers. The deductible amount is determined based on the following criteria:
The actual HRA received from the employer.
- 50 per cent of the basic salary for employees residing in metropolitan cities such as Delhi, Mumbai, Kolkata, and Chennai.
- 40 per cent of the basic salary for employees residing in non-metropolitan cities.
- The actual rent paid minus 10 per cent of the basic salary.
For rental payments up to ₹1 lakh, salaried employees are not obligated to furnish their landlords' Permanent Account Numbers (PANs). However, it's crucial to note that falsely claiming an HRA deduction by declaring rental expenses below ₹1 lakh in an attempt to avoid PAN submission could result in a notice being issued by the Income Tax Department (ITD).
Recent times have seen the Department taking stringent actions against fraudulent HRA deductions. In the year 2021 alone, the department issued more than 100,000 notices to taxpayers found to have made deceptive HRA claims. These notices led to the recovery of taxes amounting to over ₹100 crore.
The purpose behind the notice
The notice aims to afford the Department a chance to scrutinise the taxpayer's assertion and ascertain the accuracy of the claimed deduction. The ITD might request the taxpayer to furnish additional details or records to substantiate the claim. Should the ITD find the taxpayer's response unsatisfactory, it could proceed with further measures, such as conducting a tax audit or initiating a re-evaluation.
An Income Tax notice may arise if a salaried employee fails to provide necessary information to their employer but proceeds to assert an HRA claim in their ITR.
Additionally, a tax notice can be prompted if you are simultaneously seeking both HRA and home loan deductions, while your residence and place of employment are situated within the same city.
Before taking any action against a taxpayer, the ITD is obligated to issue a notice. This practice is in place to ensure that the taxpayer has an opportunity to present their viewpoint and make their case heard. The notice usually outlines the rationale behind the ITD's investigation and outlines the specifics of the information or documentation required from the taxpayer.
What should you do if you get the notice?
Should you find yourself in receipt of a notice from the ITD, it is imperative to address it promptly. Additionally, it is advisable to seek guidance from a tax attorney or an accountant to ensure your response aligns accurately with the situation.
Here are several recommendations to consider when responding to an ITD notice:
- Thoroughly peruse the notice, comprehending the grounds for the investigation.
- Compile all pertinent records and details.
- Craft your response within the stipulated time frame.
- Maintain honesty and accuracy in your reply.
The right way to claim an HRA deduction
If you intend to request an HRA deduction, it's crucial to ensure accuracy in the claimed amount and be mindful of the potential risks tied to falsely asserting an HRA deduction. Here are some pointers to consider when seeking an HRA deduction:
Ensure possession of essential documents, including rent receipts and a copy of your landlord's PAN card.
- Maintain precise records of your rent disbursements.
- Uphold honesty regarding the actual rent amount paid.
- Refrain from making counterfeit HRA claims to evade PAN submission.
By adhering to these guidelines, you can avert complications with the Income Tax Department and rightfully obtain the HRA deduction you are eligible for.
Here are supplementary factors to bear in mind concerning HRA deductions:
- The HRA deduction is exclusively applicable to salaried employees who reside in rented accommodations.
- The deduction is not accessible to employees who own their residences.
- The deduction pertains solely to the rent remitted for the employee's primary abode.
- The deduction is requested in the income tax return filed for the fiscal year in which the rent payment occurs.
Is claiming a deduction against HRA a cause for concern?
If your residence and workplace are situated in separate cities, and you're asserting both HRA and home loan deductions, your situation remains in good standing provided you have furnished the necessary particulars to your employer and your ITR doesn't reveal any discrepancies.
The Income Tax Act permits the concurrent claiming of HRA and home loan deductions under these circumstances, provided the following criteria are met:
- You hold salaried employment.
- Your abode is rented.
- Your home and workplace are geographically distant.
- You possess a home loan for the house you own in the city where your employment is based.
If you are seeking an HRA claim that falls below ₹1 lakh, it's vital to ensure actual rent payments at that level and confirm the absence of a home loan in the same city. This precaution is essential because the ITD might request evidence of both rent payments and home loans, particularly if they suspect a fraudulent HRA deduction.
Even for HRA claims under ₹1 lakh, possessing a valid rent agreement remains crucial. This agreement serves as substantiation of rent payment if requested by the Income Tax Department.
Here are additional considerations if you're claiming an HRA deduction below ₹1 lakh:
- The rent sum should be reasonable and in line with prevailing rates in the locality.
- Ensure your rent payment is made either in cash or via cheque, retaining the receipts.
- Possess a copy of the rent agreement.
- Accurately report the HRA deduction in your income tax return.
By adhering to these guidelines, you can avert any potential issues with the Income Tax Department and rightfully avail of the HRA deduction entitled to you. However, if you are uncertain about the rules governing deductions and taxation, consider seeking the advice of a tax professional.