NEW DELHI: Gone are the days when taxpayers could claim house rent allowance falsely with illegal use of a Permanent Account Number (PAN). Now with technological advancement, it has become easy for the tax department to flag such fake claims.
The Tax Administration has noted cases where employees use PANs of individuals other than the actual income-earners to make inflated tax exemption claims, citing reluctance from landlords to provide their PANs. Instead, employees use PANs of family, friends, or low-income individuals to avoid accurate income reporting. Such actions can lead to tax evasion and penalties, emphasising the importance of truthful tax filings to avoid legal consequences.
The tax administration has uncovered about 8,000-10,000 high-value cases involving amounts exceeding R10 lakh each of fraudulent HRA tax exemption claims where the PAN provided by the income-earner was found to be illegitimate after verification. Consequently, employees making such false claims faced tax liabilities, along with interest and penalties. The tax administration warns that inaccurate tax exemption claims could result in prosecution, underscoring the importance of employees refraining from making artificial claims to avoid legal repercussions.
HRA exemption
Salaried employees who stay in rented housing are allowed to avail tax exemption for HRA. This exemption is granted by the employer while calculating the tax deducted at source (TDS) on salaries.
Employees staying in metro cities and other large cities are able to save significant taxes by claiming the exemption for HRA.
The claim of HRA exemption requires the employee to submit, among other things, the PAN of the person to whom rent is paid. This is a cross-check mechanism deployed by the tax administration to ensure that the relevant rent income is reported to the PAN of the income-earner, and is eventually subjected to income-tax. The employer and the employee, in their respective tax filings, are also required to quote the PAN of the landlord, as submitted by the employee.
Employers are responsible for conducting reasonable due diligence on the documentation provided by employees but are not expected to verify the factual accuracy of every detail. Courts have clarified that employers’ role primarily involves ensuring appropriate checks and balances rather than conducting extensive investigations. In cases of false claims, employers may face inquiries from the tax administration regarding the verification procedures for legitimate tax exemptions. Therefore, it is essential for employers to enhance their verification processes related to TDS on salaries and tax exemptions to maintain compliance and avoid potential issues.
If a taxpayer has already received a tax notice, he should re-examine his HRA claim. If the claim is based on valid documents, the taxpayer can provide those documents to the Income Tax Authorities for verification. That's why it is important for taxpayers to keep documents like owner's PAN, rent agreement and bank statements for at least last four years.
"If the claim is indeed invalid, the taxpayer does not have much of a choice. As a good citizen, the taxpayer should come forward with the discrepancies and pay the differential tax with interest," says Daga.
According to experts, anyone who has claimed such fake deductions, rebates, etc., will face severe penal actions. Accordingly, if anyone has made such a false claim or deduction, they will have to face a heavy penalty, which will be 200% of the tax and interest at the rate of 1% per month.
Documents required
There is often a debate between employers and employees regarding the required documentation for claiming HRA exemption and the extent of verification needed. While some employers request house rent agreements, rent receipts, landlord’s PAN, and additional documents, others may only ask for rent receipts. The key question is what legal requirements are needed for claiming HRA exemption, leading to differing approaches among employers.
For claiming HRA exemption, an employee needs to submit, among other things, the PAN of the person to whom rent is paid. This is a cross-check mechanism deployed by the Tax Administration to ensure that the relevant rent income is reported to the PAN of the income-earner, and is eventually subjected to income-tax.
The employer and the employee, in their respective tax filings, are also required to quote the PAN of the landlord, as submitted by the employee.
“The challenge comes from the generic and overall requirement of the law for the employer to ensure that the employer collects appropriate and sufficient evidence in support of tax exemptions granted to the employer. The requirement itself is generic but it is clear that the employers are expected to undertake reasonable verification that excessive exemption is not granted to the employees,” says Chetan Daga, a chartered accountant (CA) and founder of AdvantEdge consulting.
According to CA Ved Jain, former President of the Institute of Chartered Accountants of India (ICAI), in many cases deduction has been claimed for arranged donation to political parties -many of such political parties being almost non-existent.
House Rent Allowance
Cases have emerged where employees use PANs of individuals unrelated to the income-earner to make inflated HRA tax exemption claims
Individuals who made false claims in AY 21-22, AY 22-23, and AY 2023-24 should file updated returns
PAN of the individual to whom rent is paid is used as a cross-check mechanism to ensure accurate income reporting and taxation
Deductions claimed for arranged donations to non-existent political parties will lead to severe penalties
Employers are expected to conduct reasonable due diligence to verify the authenticity of documentation provided by employees for tax exemptions