Rent Receipts Without Evidence No Longer Valid To Save Tax Under HRA; Salaried Employees In A Fix?


Rent Reciepts Taxes

Since ages, salaried employees have been using one time-tested and reliable method to save tax: House rent paid under House Rent Allowance. But no longer now.

In a crackdown on this ‘formula’ to save tax, Income Tax dept. Will now no longer consider fake rent receipts as a valid form for tax concession. Employees will be required to provide additional evidence and documents to support their claim.

This is one major blow to the salaried employees, as saving tax become tougher.

How Did IT Dept Discover This Tax Saving Strategy?

Unknown to all salaried employees who had been using this method to save taxes, Income Tax department was well aware of this loophole. But they chose to ignore it.

The employer usually puts an amount from the salary under ‘House Rent Allowance’, and the employee used to save tax on 60% of this amount by submitting fake rent receipts.

Under this protocol, both the employer and the tax officials chose to give salaried employees some breather, as they allowed the protocol of submitting fake rent receipts to avail tax concessions under HRA. They considered it as a ‘minor sin’.

However, in a recent case in Mumbai, a salaried employee attempted to avail tax benefits by claiming that the house rent was paid to his mother. Income Tax department fought this case, and the matter reached Income Tax Appellate Tribunal.

In their ruling, Income Tax Appellate Tribunal (ITAT) ruled that the method for availing tax exemption using fake rent receipts is wrong.

Explaining the ruling by ITAT, Dilip Lakhani, senior tax advisor, Deloitte Haskins & Sells LLP said, “The ITAT (Income Tax Appellate Tribunal) ruling has now laid down the criteria for the assessing officer to consider the claim of a salaried employee and if necessary question its justification. This will put the onus on the salaried class to follow the rules in availing the tax rebate,”

How Will HRA Tax Concession Work Now?

As per the ITAT ruling, the concerned tax official who is monitoring the tax concession filed by a salaried employee can ask for further proof, in case he or she feels that rent receipts are fake.

Some of the additional documents which can be asked are:

  • Leave and licence agreement
  • Housing co-operative society letter, about the tenant and the owner
  • Electricity bill
  • Water bill
  • Stamp paper agreement between the tenant and the landlord and more

A tax officer said, “In case of HRA exemption, the assessing officer may crosscheck whether the address mentioned in the ITR form is the same as the property on which rent is paid,”

The tax exemption under HRA was sought under Section 10(13A) of the Income Tax Act, according to which employees can avail tax exemption on actual HRA received or 50% of the basic salary for an employee working in metro cities and 40% of basic salary for an employee working in non-metro city.

However, the recent ITAT ruling may set a precedent across India, and make it tough for salaried employees to avail tax concessions under HRA.

If you are an salaried employee, then we would love to listen to your views on this ruling. Do share your comments right here!

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