JAIPUR BRANCH OF CIRC OF ICAI
TAX DEPARTMENT DETECTS HRA
FRAUD WITH ILLEGAL USAGE OF PANS!
CA AMAN RAJPUT
amanrajput4735@gmail.com
Introduc on
As 31st March have approached many clients along with my
fellow colleagues are asking me for HRA deduc on and its
eligibility, most of the client's fail to follow the guidelines in
the act and end up paying heavy fines and penal es due-to
fake HRA's, in this ar cle we will discuss everything about
HRA including it's meaning, condi ons, case laws and
mistakes which is done by assessee.
Meaning of HRA
House Rent Allowance or HRA is an allowance given by an
employer to an employee to cover the cost of living in rented
housing. HRA is not en rely taxable, even though it is a part
of your salary. A por on of HRA is excluded from taxa on
under Sec on 10 (13A) of the Income Tax Act of 1961, subject
to some provisions.
Basic condi ons for availing HRA
1. The employee should be a salaried
individual and must receive HRA
2. Employee must actually be paying rent for a
re s i d e n a l a c co m m o d a o n h e /s h e
occupies
3. Employee must not own residen al
accommoda on for which HRA is being
claimed
The exemp on on HRA is calculated as minimum of the
following three amounts
1. Actual HRA received from employer
2. Rent paid minus 10% of basic salary
3. 50% of basic salary if employee lives in a
metro city or 40% of basic salary if the
employee lives in a non-metro city
Metro ci es in India and issues raised by Financial Express
(India)
Currently, the defini on of metro ci es encompasses Delhi,
Mumbai, Chennai, and Kolkata, However, as per the reports
an cipa on surrounds the possibility of this defini on
expanding to include burgeoning urban hubs like Bengaluru,
Pune, Hyderabad, and Ahmedabad. The impetus behind this
expansion is to afford residents of these ci es a higher HRA
deduc on, poten ally catalysing migra on and urban
growth.
Further the ar cle on Financial express say's as per financial
express, as we delve into the house rental trends in these
ci es, a no ceable gap emerges. Mumbai, for instance,
boasts the highest average rental of Rs 30,000-50,000 per
month for a 1,000 sq feet apartment.
JAIPUR BRANCH OF CIRC OF ICAI
Delhi follows closely behind with rentals ranging from Rs
20,000-30,000 per month for the same space. Further, this
disparity con nues across ci es, with Bengaluru, Pune,
Hyderabad, and Kolkata falling in the range of Rs 17,000-
25,000 per month.
Ahmedabad and Chennai stand out as the most affordable
ci es in terms of rent is ranging from Rs 17,000-19,000. The
ques on that arises is whether it is equitable for HRA
deduc ons to remain uniform across all ci es or if
differen a on based on actual average rentals is more
jus fiable.
Hence in short it urges government to consider an individual
earning `10 lakh per annum (basic salary plus DA). At the 50%
tax limit, this individual is eligible for a tax deduc on of Rs 5
lakh per annum or Rs 41,667 per month. However, in
Mumbai, this deduc on might only secure a 1,000 sq feet
apartment, while in Chennai, it could afford double the space.
This apparent tax advantage uninten onally favours
residents in ci es with lower average rentals.
The recommenda on to include Bengaluru, Pune,
Hyderabad, and Ahmedabad as metros for HRA calcula on is
undoubtedly overdue, as their rental landscapes mirror those
of current metro ci es. However, a more nuanced approach is
impera ve for HRA deduc on, par cularly when considering
the diverse property rental rates across ci es, with Mumbai
and Delhi standing out as hotspots.
What are the provisions of TDS and PAN card?
It is mandatory to furnish the PAN card details of the
individual to whom rent is being paid if the annual rent
exceeds Rs. 1 lakh. This can be done by submi ng Form 12BB
to the employer.
Alterna vely, if PAN details are not available, a declara on
from the landlord sta ng the same, along with their name
and address, must be provided to the employer. Regarding
Tax Deducted at Source, for rent paid for land, building,
furniture, fi ngs, or a combina on thereof, TDS is applicable
at 10% of the total amount exceeding Rs. 2.4 lakh annually.
This is under sec on 194I for businesses or professions
exceeding a turnover or gross receipts of Rs. 1 crore or Rs. 50
lakh, respec vely, necessita ng tax audits. But for others i.e.
individuals or Hindu Undivided Families (HUFs) not liable to
undergo a tax audit, TDS is applicable at 5% on rent paid if it
exceeds Rs. 50,000 per month. This falls under sec on 194M.
Now you might be wondering about the reasons for no ces
are being received by salaried employees with respect to
HRA
Recently Income Tax Department has sent more than 10,000
No ces to salaried employees with respect of fake or non-
compliant HRA. Conti...
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 JAIPUR BRANCH OF CIRC OF ICAI
TAX DEPARTMENT DETECTS HRA
FRAUD WITH ILLEGAL USAGE OF PANS!
What are the mistakes that are commi ed by salaried
employees while claiming HRA as a Tax deduc on?
The first one is they are not making any rent agreement with
the party, this case is especially while paying rent to family
members for claiming deduc on in taxes, also in case of
rela ves or friends who are earning less income. Remember
in case it happens to be a scru ny for your HRA deduc on it
may be disallowed if there is no rent agreement and you need
to pay back taxes on the disallowed income along with
interest and penalty
Secondly, many professionals and tax preparers rely just on
rent receipt as evidence for claiming HRA, in this case, tax
officer or AO might not get sa sfied and may demand more
evidence by the taxpayer and in the absence of that evidence
may disallow the income
Third is some employees are just concerned of bogus entries
and do not pay rent in the bank account of the landlord,
especially while claiming rent paid to family members
assuming to show rent paid in cash
Case laws concerned
In the case of Mrs. Meena Vaswani vs. ACIT [2017] 164 ITD
120 (Mum Trib.), the assessee paid rent to her mother
without providing any suppor ng evidence such as a leave
and license agreement or payment through bank
transac ons. The submission of mere affidavits and rent
receipts from the mother was deemed insufficient.
Addi onally, upon inspec on by the Department, the claim
made by the assessee was disproved. Consequently, the
Income Tax Appellate Tribunal (ITAT) disallowed the HRA
exemp on to the assessee.
My points: As I have explained this point above, that AO
might not get sa sfied and may demand more evidence in
case one solely has rent receipts
In the case of Abhay Kumar Mi al vs. DCIT [2022] 194 ITD
224 (Del Trib.), a salaried individual had paid rent to his wife
for a house registered in her name, and the wife had her own
sources to acquire the property. The rent income was
declared as 'income from House Property' in the wife's
income tax return. The Income Tax Appellate Tribunal (ITAT)
ruled that the Revenue's argument against the husband
paying rent to his wife "lacks legal merit." The ITAT affirmed
that it is legally permissible for a husband to pay rent to his
wife.
In the case of Bajrang Prasad Ramdharani vs. CIT [2013]
60SOT 66 (Ahd Trib.), the assessee paid rent to his wife for a
house jointly owned by them, and they resided together in
the same house. The rent was paid through bank transfers,
and rent receipts were submi ed as evidence. The Income
Tax Appellate Tribunal (ITAT) concluded that the assessee
fulfilled the condi ons of the provision, namely, occupying
the house and paying rent. Therefore, the assessee was
deemed eligible to claim exemp on under sec on 10(13A).
JAIPUR BRANCH OF CIRC OF ICAI
From the above case laws it is very clear that only the
following two condi ons need to be sa sfied first employee
m u s t a c t u a l l y b e p a y i n g r e n t fo r a r e s i d e n a l
accommoda on and must not own the residen al
accommoda on for which HRA is being claimed.
Now what is the case?
The cases first came to light when authori es found alleged
rent receipts of around Rs 1 crore by an individual. Further
probe revealed that the individual indeed did not receive the
rent that was shown against his name.
The case prompted the income tax department to further
inves gate the ma er and it turned out that there was
rampant misuse of PANs by unscrupulous individuals to claim
tax deduc ons from their employers. So much so that officials
have now come across cases where employees of certain
companies have used the same PAN to claim tax deduc ons.
Tax officials have announced a crackdown on employees who
have made fraudulent claims, with the aim of recovering
owed taxes. It remains uncertain whether legal ac on will be
pursued against these individuals. This situa on underscores
another occurrence of PAN misuse, o en without the
cardholder's knowledge. Complica ng ma ers further is the
current applica on of TDS only for monthly rents exceeding
Rs. 50,000 or annual payments surpassing Rs. 6 lakh.
Consequently, many employees have exploited this loophole
to evade taxes on rental income.
Are employers liable for this?
Tax officials have emphasized that the responsibility rests
solely on the employee, absolving the employer of any
liability, even in cases where mul ple individuals cite the
same PAN for rent payments. While employers are not
required to conduct extensive inves ga ons, they are
expected to implement reasonable checks and balances
when verifying proof of rent paid for HRA exemp on. Some
employers have established policies wherein employees
found to have submi ed false claims for HRA or LTA shall face
termina on from employment.
In conclusion, the recent revela on of HRA fraud involving
illegal usage of PANs highlights a concerning trend of tax
evasion among certain individuals. The Income Tax
Department's crackdown on fraudulent claims underscores
the seriousness of the issue and the need for stringent
enforcement measures. While the responsibility primarily
falls on the employees making the false claims, there are calls
for employers to exercise greater diligence in verifying proof
of rent paid for HRA exemp on. However, it's important to
note that employers themselves are not inherently liable for
such fraudulent ac vi es. Moving forward, it's crucial for
both individuals and employers to adhere to tax regula ons
and uphold integrity in tax-related ma ers to maintain the
integrity of the system.
My advice: File your ITR by taking genuine deduc ons and
exemp ons to avoid any legal issues
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