Tax dept tightens claims scrutiny: Key rules for rent paid to parents

Have a rent agreement and keep pay receipts: Those are among steps you can take to avoid getting a notice

Many salaried individuals claim tax exemption on house rent allowance (HRA) by paying rent to family members, such as parents. While this is legally permissible, the Income Tax Department has intensified scrutiny of such claims.

 

Increased scrutiny

 

Tax authorities say they have observed instances where individuals claimed HRA exemption without fulfilling rules to do so.

 

Common issues include:

 

• Lack of a formal rental agreement.

• Rent payments made in cash, or lacking bank transaction proof.

• Absence of rent receipts.

• Landlords not declaring rental income in their tax returns.

 

Such discrepancies raise flags, prompting the department to issue notices seeking clarification to many individuals recently.

 

Below are the steps you can take to safeguard yourself.

 

 

Steps to Ensure Compliance and Avoid Notices

 

 

1. Rental agreement: Draft a clear agreement with your relative, specifying rent amount, payment terms and duration. The document serves as primary evidence of the rental arrangement.

 

 

2. Bank transactions: Pay rent through for banking channels like electronic fund transfer or Unified Payments Interface. Avoid cash payments: they are cumbersome to trace and validate.

 

 

3. Rent receipts: Collect monthly rent receipts signed by the landlord, detailing the amount, period, and property address.

 

 

4. Landlord's PAN: If annual rent exceeds Rs 100,000, furnish the landlord's PAN to your employer. This ensures transparency and aligns with tax regulations.

 

 

5. TDS deduction: If monthly rent exceeds Rs 50,000, deduct 2 per cent Tax Deducted at Source (TDS) and deposit the amount using Form 26QC. Provide Form 16C to the landlord as proof.

 

 

6. Landlord's tax declaration: Ensure that the relative receiving rent declares it as income in their tax return. This corroborates your HRA claim and demonstrates transparency.

 

 

Expert Insights

 

 

"The foundation of any legitimate rental transaction is its genuineness", said Aarti Raote, partner at Deloitte India. "Rent received from close family members is subject to greater scrutiny, so it’s essential to maintain proper documentation. A rental agreement and rent receipts, which align with bank payment entries, are crucial for supporting HRA claims. Additionally, the landlord’s PAN must be provided to the employer when claiming HRA, and it should be included in their tax return as well."

 

 

"Rent received from family members must be disclosed in the house property section (Schedule HP) of the tax return, which includes details like the share in the property and the tenant’s name and PAN. This ensures the tax department can correlate the rental receipts with the HRA claim of the tenant", said Raote.

 

 

What to do if you receive a notice

 

 

If the Income Tax Department questions your HRA claim:

 

 

• Respond promptly, providing all relevant documents like the rental agreement, rent receipts, and bank statements.

• Ensure the landlord's PAN and their tax return reflect the rental income.

• Consult a tax professional if needed to address the notice effectively.