Claiming HRA? Get the house owner's PAN

Kalpana Sinha, a tenant in a Mumbai suburb, often tells her house owner that her payment of rentals — Rs 30,000 a month — do not allow her to claim tax benefits. While the owner is willing to give her a temporary receipt, it contains little detail about the owner.

Sinha would be relieved at the latest circular from the Central Board of Direct taxes, which says that rentals of more than Rs 1.8 lakh a year need to have proper documentation, with the owner's permanent account number (PAN).

Similarly, many chartered accountant advise clients that they can claim house rent allowance (HRA) even if staying in their parents' or spouse's flat. That is, they can pay the rent to their spouse or parents and claim the same. And, often, parents or spouse (especially, if she is a housewife) do not have a PAN. Sometimes, when both are working, they pay rents to each other.
 

A LOOK AT THE RULES

• CBDT circular says rentals of over Rs 1.8 lakh a year need the owner’s PAN
• Those paying rent to parents’ or spouse’s flat will need to show PAN
• Owner needs to give declaration in absence of PAN
• HRA payment can be traced through owner’s PAN
• Cash rentals mostly practised when HRA is huge, hence the threshold of Rs 1.8 lakh
• Owner’s PAN, if not furnished before due date, may result in HRA benefits being withdrawn

Such people now need to be more careful. Payment of HRA can be traced through their spouse or parent's PAN numbers. As a result, taxes will have to be paid on such rentals by the recipient.

Amitabh Singh, tax partner at Ernst & Young, explains, "There are many who show they pay rent to their family member and claim HRA benefits. The employee may be doing this only to get HRA and the family member may not be reporting the rental income." This is mostly practised where the HRA in question is a big amount. Hence, the tax authorities have kept a threshold of Rs 1.8 lakh or rent of Rs 15,000 a month.

In case the house owner does not have a PAN, a declaration to this effect from him/her, with name and address, should be filed by the tenant-employee, it further says. It should be signed by the landlord, with a valid identity proof such as passport details, ration card or voter's card. A copy of the declaration format should be given to the tenant.

Since the circular's introduction in August, tax consultants say they have started advising clients to obtain the PAN of the house owner. They say if this is not furnished before the due dates for filing proofs on tax-saving investments, that is, before February 2012, the HRA benefits may be withdrawn, because there are no alternatives provided in the circular if the woner's PAN/declaration is not available. And, the additional tax liability for 2011-12 may be recovered between January and March 2012.

However, the circular is silent on whether the employee's HRA can be honoured in the absence of such documentation. "Because, the law or the Income Tax Act does not prohibit anyone from getting HRA benefits in the absence of landlord's details," says Kaushik Mukherjee, ED (tax & regulatory practices), PricewaterhouseCoopers. Section 10 (13A) on HRA benefits does not have any clause where the claim will not be honoured if the house owner's details are not attached by the tenant or HRA claimant.

Experts say as long as you can provide details like the rent receipt or rent agreement, there should not be any problem. And, rent agreements are supposed to also have the house owner's PAN details. "The problem gets solved if you pay the rent online or through cheques. You can also show your bank account statements. These are good enough proofs and you cannot be denied your claim," says Homi Mistry, tax partner at Deloitte, Haskins and Sells.