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HRA exemption: Claiming House Rent Allowance tax benefit? Keep these 5 important documents handy in case income tax department asks

HRA tax exemption

: Many employees have the provision for

House Rent Allowance

(HRA) as a part of their salary structure. To lower their tax burden, many claim HRA exemption if they live in rented accommodation. Recently, the Income Tax Department discovered HRA fraud involving illegal use of Permanent Account Numbers (PAN). They found thousands of high-value cases, some exceeding Rs 10 lakh.
As a result, there could be more scrutiny of HRA claims, particularly for larger amounts.

Generally, the income tax department can revisit old tax returns filed up to four years ago. Taxpayers should retain records of their claimed deductions and exemptions during this period.
According to ET, it’s important to keep specific proofs readily available to ensure that the tax department accepts your legitimate HRA tax exemption when filing your income tax return (ITR). Below is a list of documents to keep handy and actions to take to avoid rejection of your HRA tax exemption.
ALSO READ | Income Tax Rules FY 2024-25: New vs old tax regime – 6 rules salaried individuals should know

Valid rent agreement

As a tenant, make sure you have a valid

rent agreement

with your landlord. Ensure the agreement complies with income tax laws, especially if the monthly rent exceeds Rs 50,000. In such cases, Tax Deducted at Source (TDS) must be deducted from the rent. The agreement should specify if TDS is applicable, who will deduct it, and the method of deduction.
Additionally, the rent agreement should include basic details of both the tenant and landlord. Tax experts recommend including PAN and Aadhaar details of both parties as a good practice.

Rent receipts

In addition to a valid rent agreement, it’s crucial for individuals to collect rent receipts for the payments made. According to tax experts, merely having a rent agreement might not suffice as proof for claiming HRA tax exemption. Rent receipts serve as evidence that the tenant has indeed paid the rent amount during the financial year. It’s important to collect these receipts even if the rent is paid electronically, such as through net banking.
Furthermore, employers may request both the rent agreement and rent receipts to deduct TDS from the salary. If either document is missing, the employer might deduct a higher tax from the salary income. Therefore, it’s essential to maintain both documents to avoid any discrepancies.
ALSO READ | New income tax return forms ITR-1, ITR-2, ITR-4 available for FY 2023-24; know details AY 2024-25 e-filing

Rent payment by electronic payment channels

Chartered accountants recommend paying rent through electronic channels like Net banking or UPI rather than cash. Electronic payments create a transaction record, which can serve as proof if the income tax department requests it. Income tax regulations limit cash payments of Rs 2 lakh or more under Section 269ST of the Income-tax Act, 1961. Tax experts caution that cash payments exceeding this limit may incur penalties under Section 271DA.

Landlord’s PAN

If you’re seeking HRA tax exemption from your employer and the rent paid exceeds Rs 1 lakh in a financial year, you must provide your landlord’s PAN. However, if you choose to claim the HRA tax exemption while filing your ITR instead, the landlord’s PAN is not required by the income tax department. Nevertheless, it’s advisable to retain a copy of the landlord’s PAN in case it’s requested by the tax department in the future.

Rent to family members

Income tax laws do not prohibit paying rent to family members. However, it’s advisable to maintain necessary documents even when renting from family members to avoid rejection of HRA tax exemption by the income tax department. Additionally, individuals should request family members to declare the rent received as income in their tax return, especially if

ITR filing

is mandatory.