Employers will soon start asking employees to communicate their preferred income tax regime for TDS on salaries. Based on the tax regime chose, an employee has to submit tax-saving investment and expenditure proofs to calculate tax on salary. Those staying on rent can claim a deduction through the House Rent Allowance (HRA) option if provided by employer as a part of salary. But one question that usually crops up is whether both rent receipts and rent agreement required as proof to make the claim?
"Rent agreement is important but may not be a sufficient document on its own to claim HRA exemption for tax purposes," says Akhil Chandna, Partner, Grant Thornton Bharat. "Rent receipts serve as evidence that the employee has actually paid the rent amount mentioned in the rent agreement. Hence, it is advisable for an employee to maintain rent receipts along with the rent agreement; and furnish these before the assessing officer when questioned."
Mere execution of a rent agreement does not guarantee actual rental payments, explains Tarun Kumar Madaan, Tax Head, Coherent Advisors. "Some individuals may execute rent agreements with family members but not make rental payment transactions. In such cases, the absence of rent receipts and proof of actual payments could lead to the denial of the HRA claim by the assessing officer."
It is important to keep proof of tax exemption or deduction claimed while filing income tax return (ITR). This is because the income tax department may ask the individual for proof of the claims made in the ITR. The income tax department can ask for documentary proof when the ITR is being processed.
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Madaan says, "The assessing officer can reject HRA tax exemption claim if the employee fails to provide supporting documentation, such as rent receipts, despite having a valid rent agreement with the landlord. The assessing officer possesses various powers to gather information and verify the legitimacy of claims in taxpayers' ITRs. They may conduct inquiries or request documents deemed necessary for this purpose. The exemption for HRA shall be allowed to the employee if he is living in a rented accommodation and actually pays rent in respect of such residential accommodation. A rent receipt serves as evidence of rent payment to the landlord; hence, the rent receipt must be collected from the landlord even if rent is paid via electronic channels."
It is the discretion of the assessing officer to accept, reject or verify the claims made in an ITR, says Abhishek Soni, CEO of Tax2Win.in, an ITR filing website. "The officer can accept your HRA claim even if you don't have rent receipts provided, he or she is satisfied with the genuineness of your claim. To ensure that HRA tax exemption is not rejected by the assessing officer, one must collect rent receipts for rent paid via banking channels as well."
A rent agreement doesn't prove the actual payment of rent but a rent receipt serves as evidence that the employee has paid the rent specified in the agreement, says Chandna of Grant Thornton Bharat.
As tax experts have pointed out, one must have rent receipts and the rent agreement to provide documentary evidence for the rent paid.
Soni says, "As the employee is claiming the HRA tax benefit as per the provisions of the income tax law, it is advisable to have the proper documents and proofs with respect to the deduction claimed in the ITR. This includes having proper rent agreement, rent receipts and payment of rent preferably via electronic channels."
Madaan says the rent receipt should mention the name of the landlord, the address of the landlord, the amount paid along with the TDS deducted (if applicable) and mode of payment (cash or electronic). "Affix a revenue stamp if the monthly rent payment in cash exceeds Rs 5,000."
Employees are eligible to claim HRA tax exemption if they have received HRA from their employer, have been living in a rented apartment and have actually paid rent during the financial year. They can claim HRA tax exemption by submitting proof of paying rent, to the employer and getting the tax exemption reflected in Form 16 issued by the employer.
Alternatively, if proofs are not submitted to the employer, then HRA tax exemption can be claimed in the ITR at the time of filing it. Here if the income tax department accepts your claim, then proof is not required to be submitted to them. However, if the assessing officer raises doubt, then proofs are required to be provided for the exemption claimed.
The proof has to be submitted on time (as specified by your employer) to avoid excess tax deducted at source (TDS) from your salary income, provided you have opted for the old tax regime.
Employees have to mandatorily provide PAN or Aadhaar to employer of the landlord if the total rent paid in a financial year exceeds Rs 1 lakh. The individual paying rent has to deduct TDS on rent paid if monthly rent exceeds Rs 50,000. If the Landlord is NRI, then TDS must be deducted for every rent amount paid.
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