07/04/2017
Are you claiming HRA by paying rent to Parents,Wife or Relatives..then read this article.
Recently in 2017 March, ITAT Mumbai Bench did not allow HRA exemption claim stating it as based on sham rent payments supported only by rent receipts from mother without paying actual rent. In the view of above decision many salaried employee who are claiming HRA by paying to their parents, relative and friends have to know proper rule under which HRA can be claimed and what all documents are required, including legal judgments supporting the claim. The article give you a detail guidelines so that you can claim proper HRA as per the rules and have adequate documents to support your claim. There is nothing in the law to stop the taxpayer from renting premises from parents and relative and claiming the HRA benefit for such rental payment.
1◘How HRA is calculated?
Under Section 10(13A) of the Income Tax Act, the deduction on HRA is the lowest of the following
○ Actual HRA received from the employer
○ 50 per cent of (basic salary + dearness allowance) for those
living in metro cities (40 per cent for non-metros)
○ Actual rent paid less 10 per cent of salary
2◘What is latest Mumbai ITAT judgment and how it impact salaried
employee paying rent to parents?
○ According to a new tribunal ruling, the Income Tax Department can now seek documents to prove that the taxpayer is a genuine tenant. The following was the observation “HRA exemption claim cannot be allowed u/s. 10(13A) based on sham rent payments supported only by rent receipts from parent where assessee produces no evidence arising in normal course of happening of transaction of hiring premises such as leave and license agreement, letter to society intimating about assessee's tenancy, payment through bank, cash payments backed with known sources, electricity bill payments through cheque, water bill payments through cheque, some correspondence coming during that period of alleged tenancy to prove that transaction of hiring of premises was genuine and was happening during the said period and where assessee's parent files no ITR reflecting rent received from assessee and the rent paid looks excessive for a One BHK flat”
○In this case the assessee claimed that she was staying in a house owned by her old aged mother so that she can take care of her ailing mother. She further claimed that she was paying her mother a monthly fixed rent so that her other siblings don’t object to her staying with her mother and as this was a transaction with her mother, she never felt any need of a formal/written agreement. The fact was she was actually staying in a house jointly owned by her with her husband, located at only 5-minute walking distance from her mother’s house. On a deeper scrutiny of the case, she was unable to prove that she was actually staying in a rented house owned by her mother and was even unable to prove that she actually paid any rent in cash to her mother as her bank statement hardly had any cash withdrawals.
From the above it was clear that though Assessee had rent receipt the transaction was not allowed to be claimed based on following
• No Rent Agreement was made
• No proof of Payment of Rent ( Example bank entry showing rent
paid)
• No Electricity or Water Bill payment by tenant
• Rent paid excessive compared to same localities and same size
flats
• No ITR filed by parent showing Incoming as Rent receipt
Many people claim HRA by paying rent to their friends, relatives or family members. And so they do not care about taking proper rent receipts, making regular rent payments etc. So in these cases, the income tax officer may not consider it as a genuine case now and so he may disallow the HRA exemption.
3◘What all precaution need to be taken or documents to be
prepared in case of rent payment to parents or relatives and
claiming exemption in HRA?
○The Income Tax Appellate Tribunal recent Mumbai ruling has now laid down criteria for the assessing officer to consider the claim of a salaried employee and, if necessary, question its justification. This will put the onus on the salaried class to follow the rules in availing the tax rebate, the assessing officer can now demand proof — such as leave and licence agreement, letter to the housing co-operative society informing about the tenancy, electricity bill, water bill etc. — in allowing a lower taxable income as computed by a salaried employee. The income tax department now has good reason to insist on proof from the tax payer showing that he is indeed a genuine tenant, staying in the property in question.
Following are the documentation and trial to be maintained:
•Rent agreement is duly executed on a properly stamped paper
and signed by both parties
•Ensure that properly stamped rent receipts are issued on a
monthly basis
•Normally in a rented property, the electricity charges is borne by
the tenant so need to keep in mind that all the payments are
going from Tenant account
•Ensure a letter is send to Society stating the premises are rented
out
•Rent payment is preferably made through Banking Channel like
NEFT or Cheques
•Rent Paid is reasonable compared to locality and size of
apartment
•If landlord is family member ensure he or she is filing Income Tax
Return and showing rent as Income.
4◘What all precaution an Employer need to take before allowing
HRA claim?
○ Last year, the Income Tax Department had notified a new form - Form 12BB - for standardizing the process for claiming deductions, including HRA. Employees have to furnish evidence of claims and tax-saving investments to their employers through Form 12BB. But earlier, there was no standard format and with standard format is in place now , it will help in documentation for both employees and employers. To claim the HRA exemption, employees have to furnish the rent receipts irrespective of the rent amount. However, if it exceeds Rs. 1 lakh, copy of landlord's PAN has to be furnished. The tax authorities through the landlord's PAN can verify whether the rent received by the landlord has been duly disclosed in his/her tax return..
article taken from the expertmile
