The income tax department has uncovered a scheme involving fraudulent use of Permanent Account Numbers (PAN) by individuals to falsely claim house rent allowance (HRA), despite not being tenants, stated a Times of India (ToI) news report. As per initial findings, around 8,000-10,000 significant cases have been identified, with amounts exceeding Rs 10 lakh in many instances. The investigation began when authorities stumbled upon purported rent receipts totaling approximately Rs 1 crore under an individual’s PAN. However, upon questioning, the individual disavowed any knowledge of these transactions. Subsequent inquiry revealed that the individual had not actually received the rent attributed to them.

Also read: HRA Exemption Rules: How to save income tax on house rent allowance under old tax regime

The revelation prompted the income tax department to conduct a deeper inquiry, uncovering widespread misuse of PANs by deceitful individuals aiming to secure tax deductions from their employers. The extent of abuse has become alarming, with instances emerging where employees from specific companies have exploited identical PANs to claim tax benefits.

Tax officials have stated that the department is actively pursuing employees who have filed fraudulent claims, aiming to recoup the owed taxes. However, it remains uncertain whether legal action will also be taken against them, stated the TOI report. This case underscores yet another example of PAN misuse, often without the knowledge of the cardholder. Adding complexity to the situation is the current threshold for TDS (tax deducted at source), which applies only to 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.

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“Most of the financial transactions are linked to PAN. With use of latest technology and automated processes and data analytics, it is not very difficult for tax authorities to track fake claims. This may not only entail tax payments later but also will result in levy of penal interest, penalty and even lead to prosecution in extreme cases. Where rent is paid to the parent, the rent should be paid through cheque or by way of electronic transfer (and not through cash) to demonstrate the genuineness of the transaction and that parent too needs to report that rental income in his or her return,” said Kuldip Kumar, partner at Mainstay Tax Advisors, told Times of India.

Also read: HRA tax exemption: Are both rent receipts and rent agreement a must as income tax proofs?

Tax officials said the fault entirely lies with the employee and the employer cannot be held liable even if multiple individuals quote the same PAN for rent payment. “Employers are not expected to make a deep investigation, but the onus is also on them to have reasonable checks and balances, while obtaining the proof of rent paid to allow HRA exemption. In fact, in some of the cases, employers have their policy that where any employee is caught having submitted a fake claim for HRA or LTA etc, such employee may be terminated from employment,” said Kumar.

What is House Rent Allowance

HRA is a part of salary that is paid to the individual and comes with specific tax benefits.

Eligibility for HRA tax benefit

To qualify for tax benefit on HRA, the individual should be a salaried employee, should reside in a rented accommodation and pay rent. Self-employed individuals are not eligible for claiming tax benefit on HRA. Further, Tax benefits for HRA are available only if the individual has opted for the old tax regime.

Calculating HRA exemption

The amount of HRA that is exempt from tax is determined on the basis of the least of the following three:

  • Actual HRA received from the employer.
  • Annual rent paid, minus 10% of the salary.
  • 50% of the employees basic salary (for employees residing in metro cities) or 40% of basic salary (for non-metro cities).

Proof of rent payment

To be eligible for tax exemption on HRA, the employee must furnish documentary evidence of rent payment, such as rent receipts or rental agreement, to the employer. It is important to have a formal rental agreement in place between the landlord and tenant. It should specify details like rent amount, duration of tenancy, and other terms and conditions.

Residence in own house

An employee getting HRA cannot claim exemption under the Income-tax Act if he is residing in his own house. He should actually be living in a rented accommodation.



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