Claiming HRA? You may need to disclose your relationship with landlord

Currently, you only declare the rent amount paid. Under the new rules, you must also state if the landlord is a relative.

The era of "paper-only" rent receipts and ignored audit warnings is coming to a close. As the government prepares to roll out the Income Tax Act, 2025 on April 1, 2026, newly circulated draft rules and forms signal a major shift toward transparency and heightened accountability for both individuals and corporations.

 

Tightening the Net: New Income Tax Rules Target Fictitious Rent and Audit Gaps

The era of "paper-only" rent receipts and ignored audit warnings is coming to a close. As the government prepares to roll out the Income Tax Act, 2025 on April 1, 2026, newly circulated draft rules and forms signal a major shift toward transparency and heightened accountability for both individuals and corporations.

 

For the average taxpayer and the corporate accountant alike, the "Business as Usual" approach to tax filings is about to undergo a significant upgrade.

 

The HRA Crackdown: Disclosure of Landlord Relationship

One of the most notable changes for salaried individuals involves the claim for House Rent Allowance (HRA).

 

An assessee claiming House Rent Allowance (HRA) is required to submit a declaration to the employer with regard to the rent estimated to be paid during the fiscal. Under the new Form 124, the assessee will also have to indicate the relationship with the landlord.

 

This move is designed to act as a deterrent against "fictitious or inflated" rental claims. For years, many employees have submitted receipts for rent paid to parents or close relatives. While genuine arrangements remain protected, the mandatory disclosure forces transparency at the point of reporting.

 

"From a governance perspective, genuine arrangements would remain protected, while artificial claims... could be identified with greater precision," notes Sandeepp Jhunjhunwala, Partner at Nangia Global Advisors.

 

What this means for you:

 

Genuine rent paid to family members remains valid.

 

But you must ensure:

 

Ownership proof exists.

Rent is actually paid through traceable channels.

Proper rent receipts and PAN details are available.

If you claim HRA casually without documentation, this change increases your compliance risk.

 

Claiming Foreign Tax Credit? More Scrutiny Ahead

 

If you earn foreign income — from salary abroad, overseas consulting, global investments, or ESOPs — claiming Foreign Tax Credit (FTC) may get more complex.

 

"The draft forms also propose to enhance the responsibility of auditors as well as the companies with regard to the disclosure of tax credit claims on foreign income. 

As per the proposed Form 44 pertaining to 'Statement of income from a country or specified territory outside India and Foreign Tax Credit (FTC)', accountants would have to independently examine foreign tax withholding certificates, payment proofs, exchange rate conversions, and treaty eligibility conditions, such as beneficial ownership and tax residency status, for a valid claim of FTC," reported PTI. 

 

Jhunjhunwala told PTI this provision would create challenges in cases where foreign jurisdictions issue consolidated tax statements without income-wise breakups, where taxes are paid in a different financial year than the income is offered in India, or where foreign tax assessments are provisional.

 

"Accountants would be required to interpret treaty provisions such as limitation of benefits clauses, credit caps, source rules, etc., which require detailed documentation," he added.

 

Under proposed Form 44:

 

Accountants must independently verify:

 

Foreign withholding tax certificates

Payment proofs

Exchange rate conversions

 

Treaty eligibility (tax residency, beneficial ownership)

 

Practical challenge:

Many countries issue consolidated tax statements without income-wise breakdown. Some foreign taxes are provisional or paid in different years than income is reported in India.

 

This means:

 

Documentation standards will tighten.

Cross-border taxpayers may face delays.

Professional advisory support becomes more important.

 

If you're an NRI returning to India or a resident earning global income, expect higher compliance scrutiny.

 

Companies Applying for PAN? Duplicate Checks Become Critical

 

The new forms require companies to declare they do not already hold a PAN. 

 

This might sound basic, but it has real consequences:

 

Companies must verify that no branch, project office, or earlier entity already has a PAN.

Foreign companies entering India must confirm no earlier withholding-related PAN exists.

Incorrect declarations can attract legal consequences.

For startups, subsidiaries, and foreign entities — internal due diligence becomes mandatory before filing.

 

Jhunjhunwala said for foreign entities entering India for the first time, coordination with advisors becomes critical to confirm that no earlier withholding-tax-driven PAN exists.

"The legal consequences clause acts as a deterrent against multiple PAN holding and identity manipulation, strengthening database integrity, but also increases responsibility on applicants to ensure accuracy and proper record verification before submission," Jhunjhunwala said.

 

Audit Remarks Now Have Direct Tax Impact

 

The new Tax Audit Form No 26 makes it a mandatory requirement to disclose whether any qualification, adverse remark, disclaimer, or emphasis of matter in the Statutory Auditors' report impacts income, loss, or book profit, and significantly raises the income tax consequences of audit observations made under the Companies Act 2013.

 

This is significant.

 

If a statutory auditor flags:

 

Incorrect revenue recognition

 

Doubtful receivables

 

Inventory misstatement

 

Under-provisioning

 

Tax auditors must evaluate whether taxable income has been understated.

 

This means companies can no longer treat audit qualifications as mere disclosure matters - for instance, if the Statutory Auditor flags an improper revenue recognition/ doubtful recoverability of receivables/ incorrect inventory valuation/ or inadequate provisioning, the Tax Auditor would need to evaluate whether these issues have resulted in under-statement of taxable income or book profits.

 

"Companies would therefore need to assess the income tax impact of any audit remarks before finalising income tax return, ensure alignment between statutory and tax positions, and maintain clear documentation explaining why a particular qualification does or does not affect taxable income, to deal with any future litigation," Jhunjhunwala said.

 

Also, the tax audit report of entities will have to disclose the details of the accounting software used, cloud/ software where the books are stored, including the IP address, country of such storage, and the address of the physical backup server located in India.  With inputs from PTI