Must have HRA Proofs if you receive Income Tax Notice

Many people use the HRA tax exemption to save money on income taxes while living in rented apartments during the financial year.

Should have HRA Proofs if you recieve Income Tax Notice

Reetu | Apr 2, 2024 |

Must have HRA Proofs if you receive Income Tax Notice

Must have HRA Proofs if you receive Income Tax Notice

The majority of salaried persons receive House Rent Allowance (HRA) as part of their salary. Many people use the HRA tax exemption to save money on income taxes while living in rented apartments during the financial year.

This may result in increased scrutiny of HRA claims, particularly high-value HRA claim amounts. Barring a few limitations, the income tax department can reopen old income tax returns (ITRs) for up to four years after they were filed. During this time, taxpayers are supposed to maintain track of the deductions and exemptions requested when completing their ITR.

Now, if you want to ensure that the tax department accepts your valid HRA tax exemption when you file your income tax return (ITR), you must maintain specific proof accessible.

Here’s a list of proofs to keep on hand, as well as steps you may take to ensure that your HRA tax exemption is not denied by the tax man.

1. Valid Rent Agreement:

As a renter, be sure you have a legal rental agreement with your landlord. Furthermore, the rent agreement must include specific clauses to ensure that it complies with income tax regulations. For example, if the monthly rent exceeds Rs.50,000, TDS will be deducted from it. The rent agreement should state whether TDS applies, who will deduct it, and how it will be deducted.

Aside from this, the rent agreement must include basic information on both the renter and the landlord. According to tax experts, including the tenant’s and landlord’s PAN and Aadhaar numbers is a smart practice.

2. Receipts of Rent:

Aside from a valid rent agreement, an individual must also save rent receipts for each payment made. According to tax experts, a legal rent agreement alone may not be sufficient to claim HRA exemption. The rent receipts show that the salaried employee paid the rent during the financial year. Rent receipts must be collected, even if the rent is paid electronically, such as through net banking. Furthermore, an employer can seek verification of both the rent agreement and the rent receipts in order to withhold TDS from the employee’s compensation. If one document is missing, your employer may deduct a higher tax from your salary income.

3. Landlord’s PAN

If you are seeking HRA tax exemption from your employer, you must provide your landlord’s PAN if your rent exceeds Rs.1 lakh in a financial year. The income tax rules allow an individual to claim an HRA tax exemption when filing an ITR if it is not claimed by the employer. Though the income tax department does not require the landlord’s PAN when submitting an ITR, it is recommended that you preserve a copy of the landlord’s PAN in case the tax department requests it later.

4. Payment of Rent via Banking Channels:

According to chartered accountants, rent should be paid electronically, such as through Net banking or UPI, rather than with cash. Rent payments received through banking channels provide a record of the transactions. If the income tax authorities ask, the bank statement can be used as proof of rent payment.

Section 269ST of the Income-tax Act, 1961, restricts cash payments of Rs.2 lakh or more. According to tax experts, paying rent receipts in cash for more than Rs.2 lakh can result in a penalty under Section 271DA.

5. Rent Payment to Family Members:

Income tax laws do not prohibit paying rent to family members. However, chartered accountants urge individuals to create and retain the necessary documentation even if the rent is paid to a family member, or the income tax department may deny the HRA tax exemption.

Aside from that, the individual should request that the family member include the rent received as income on their tax return if ITR filing is required.

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