Mistakes In HRA Claims

Last year, the Income Tax Department uncovered rent receipts worth Rs.1 crore by a single employee and take action on the company employees who had used the same PAN multiple times to claim HRA exemption. Don’t make the mistake of conducting fraud as it can result in heavy penalties, including a fine of up to 200% of the misreported amount.

HRA exemption is available under the old tax regime to salaried employees as part of their salary structure. To claim it, you need to provide documentary proof, including a formal rent agreement, rent receipts and landlord’s PAN (if annual rent exceeds Rs.1 lakh), to the employer, besides actually staying in a rented accommodation.

The usage of fake or incorrect PAN details can be easily detected via PAN verification systems, while any mismatch in the rent paid by you and that received by the landlord is bound to get a tax notice. Another red flag for the tax authorites is a mismatch in the rental address and the one linked to Aadhaar or other official records.

If an employee fails to declare or submit proof to the employer, he can still claim HRA exemption at the time of filing returns under Section 10(13A). “However, tax authorities could audit the return to verify the claim. So, preserve supporting documents, such as rent agreement, rent receipts, bank statements reflecting the payment of rent, and where the rent paid exceeds Rs.50,000 a month, evidence of tax deducted at source by the employee.

You cannot claim exemption if you stay in your own house or with parents, unless you pay them rent with a valid formal agreement and genuine bank transactions for rent transfers.

If the taxpayer pays rent but doesn’t receive HRA from employer, a separate deduction under Section 80GG is available up to Rs.5,000 a month, but is subject to conditions.

HRA claim mistakes: Red flags for tax authorities

Mistakes
You have no formal rent agreement.

You have no proof of bank transactions.

Incorrect PAN of landlord (for over Rs.1 lakh a year rent).

Rental address is not authentic.

Your HRA claim differs from that of employer.

How it’s caught
It may not always be mandatory, but its absence can raise suspicion.

Tax department can check bank statements.

It’s easily caught through PAN verification.

Mismatch with address in Aadhaar card or other official records can catch it.

Employer submits details of HRA exemption in Form 16.