Is it Ok Paying Rent in Cash without a Rent Receipt?; Know reason Why your HRA Claim will get rejected and you end up receiving Tax Notice

If paying rent in combination with an online transfer and cash gets you in trouble, a situation may arise where your landlord can deny a rent payment receipt or not declare it in his or her ITR to avoid tax. Which will get you an income tax notice, and your HRA claim can be rejected. Because for each and every HRA claim, there must be a related income offered for tax by the landlord. Although a landlord who is taking rent only in cash and does not declare it in his or her ITR would have to face trouble with the Income Tax Department,

A former IRS officer shared an interesting case study about a taxpayer who went astray with the tax authorities due to exactly this issue (the landlord failed to report rental income collected in cash). In a given year, Mr. X paid Rs. 20,000 as rent monthly, half of which was paid in cash and the other half through an online transfer, claiming the full Rs. 2.4 lakhs (Rs. 20,000) as HRA. But his HRA exemption was disallowed some weeks later; this happened because his landlord never declared the cash rent and only declared Rs. 1.2 lakhs. This incident happened to him because he was unaware of the fact that while claiming higher rent than what the landlord mentioned, the tax department might not allow for a certain percentage of HRA exemption. ‘And that can only mean having to pay more tax than initially intended.’

What should you do when Landlord only accepts cash payments?

It has been argued that landlords, who prefer to transact in cash for their rent charges, will not declare this income for taxation purposes and will not be inclined to provide one with their PAN number. However, if the annual rent paid is over Rs.1 lakh, you would still require the landlord’s PAN number because your employer will require it. In cases where the landlord has not submitted his PAN details, the employer does not consider the HRA exemption while computing TDS, which might result in the employer deducting excess tax from the employee’s salary.

What should you do if the Landlord does not provide you with his /her PAN CARD details?

If the landlord doesn’t provide his or her PAN but the tenant has all the relevant documents for proving the expenses on rent, the tenant is still free to claim the HRA exemption in the respective income tax return and apply for a tax refund of the excess tax deducted. However, this approach increases the chances of getting a notice from the income tax department, where the tenant would be supposed to produce evidence in support of his or her HRA claims.

Consequences that a Landlord may face if they accept rent in cash and do not show in their ITR?

These are the following consequences that a landlord may face if they accept rent in cash and do not show while filing their ITR:-

Prosecution: A good example is that landlords can even be jailed for this crime. The consequences of not filing an ITR involve prosecution in cases where the income tax involved is more than Rs.25,000. This offence is liable to rigorous imprisonment for not less than 6 months but maybe for an extended period of 7 years and a fine. In those conditions where the amount involved is less than Rs.25,000, the punishment can be rigorous imprisonment of not less than 3 months, extending to 2 years, in addition to a fine.

Best Judgment Assessment: If the landlord does not file their ITR, the assessing officer has the right to make an assessment based on his or her personal judgment. This means the tax officer will figure out an estimate of the taxpayer’s income and tax liability based on the information available to him or her.

Penal Interest: If the taxpayers do not pay their taxes on time, they may be liable to pay an interest rate of 1% each month on the outstanding tax amount, according to Section 234A. Further interest will be levied under Section 234B if payment is delayed.