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Now salaried class taxpayers cannot claim house rent allowance or HRA exemption on the basis of fake rent receipts in name of their mother, father, wife or any other close relative. The Income Tax Department may disallow fake HRA exemptions on basis of guidelines recently issued by the Mumbai ITAT (Income Tax Appellate Tribunal). Now onwards, such taxpayers may have to keep other documents to substantiate payment of rent to claim HRA exemption.

HRA exemption

Many salaried class taxpayers claim exemption of house rent allowance (HRA) by furnishing fake rent receipts – in the name of their mother, father, wife or any other close relative – to their employer. Till now, there was no guidance available with the Income Tax Department to deal with such cases and taxpayers firmly believed that only rent receipt was sufficient proof to show genuineness of rental payments. Taxpayers make such sham transactions with the sole intention of claiming HRA exemption in order to reduce tax liability.

 Problems taxpayers can face

Now, salaried class taxpayers which were claiming HRA exemption on the basis of fake rent receipts may find it difficult to claim the exemption. Recently, the Mumbai ITAT issued guidelines for income tax officials to deal with such cases.

In a case, a woman working as senior finance and accounts executive had claimed an HRA exemption of Rs. 7,31,640 for Assessment Years 2009-10 to 2011-12. She also owned a 2 BHK house, jointly owned by her with her husband.

She was showing payment of rent to her mother for residential purposes. She did not produce any evidence except rent receipts to substantiate that there was actual hiring of premises. Her claim was disallowed by the Assessing Officer and the CIT(A).

On further appeal, the Mumbai tribunal disallowed her claim of HRA exemption on the ground that there were no evidences available to substantiate hiring of premises except the rent receipt. The taxpayer could not produce any evidence to substantiate rental payments such as leave and license agreement, letter to society intimating about tenancy, payment through bank, electricity bill and water bill payments etc. It also said “the taxpayer was staying in her own flat with her husband which is emanating from ration card, bank statement and return of income. The mother of assessee also did not file any income-tax return since last six assessment years and said rental income was not brought to tax in the hands of mother of assesse.”

Procedure 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. You may also keep a copy of any other correspondence through email wherein there is consent of your relative to let out the house in your favour.

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.

Married women cannot claim HRA exemption by showing rental payments to their mother when actually living with husband and daughter in another house.

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. Such a probe may indicate that you are living in another house in the same city as you rented premises.

You cannot claim HRA exemption if you have own house in the same city wherein your rented house is situated. It is difficult to prove the necessity of new rental house when you already have one house at your disposal.

You can claim HRA exemption if your rented house is situated in the same city where you work but your own house is outside that city. For example, suppose Mr A is working in Delhi and claiming HRA exemption for rented premises the tax officer cannot disallow such claim if his own house in situated outside Delhi.

You will have to ensure that your rental payments do not exceed the market value of similar property in your vicinity. Suppose you are paying a rent of around Rs. 40,000 for a 1 BHK house in Delhi, it clearly shows that it is a sham transaction. 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.

If you are claiming tax deduction for EMI of home loan in your income tax return, do not claim exemption of HRA. However, you can claim both the deductions simultaneously if your own house is not in the same city in which you are working and you have taken rented accommodation in the same city where you are working.

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