Arun has recently bagged a great job and moved to Bangalore. He noticed that there’s a House Rent Allowance (HRA) component in his salary that he could make use of in order to lower his taxes. He, being a salaried individual residing in rented accommodation could claim HRA exemption to reduce his tax liability either partially or entirely. When he got in touch with his financial advisor, he was advised to follow certain dos and don’ts to the tee to make sure his HRA exemption claim is accepted.
Here’s how you can ensure your HRA claim isn’t rejected
1. Be in possession of a valid rent agreement
The very first step to making sure your HRA exemption claim isn’t rejected is to get a valid rent agreement done, even if the landlord is your parents. A valid rent agreement should be duly signed by both the parties and have all the details such as the property rented, the amount and tenure of rent, reference of utility bills or property tax if paid by you, etc.
2. Pay rent using banking channels
Avoid rejection of HRA exemption claims by avoiding paying rent by cash. Paying rent via banking channels helps track your financial transactions with the owner. Bank statements act as proof of this transaction. Hence, it is better to pay via cheques or e-banking.
3. Make sure to collect the rent receipt
Chances of your HRA exemption claim getting rejected increase if you do not ask for a rent receipt from your landlord. It’s, therefore, mandatory to collect the rent receipt every month to ensure you get the perk of HRA exemption in its entirety.
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4. Declare if co-sharing the accommodation so that your HRA exemption claim won’t be rejected
If you are sharing the rented accommodation with other tenants, there should be a reference to the number of tenants co-sharing the property in the rent agreement. Along with other details, the rental agreement should also mention what proportion of rent and utility bills each tenant will pay.
5. Provide landlord’s PAN if your annual rent is more than 1 lakh
If you are paying rent that exceeds Rs.1 lakh annually or Rs.15,000 monthly, you must submit the PAN details of your landlord to your employer. This results in a reduction of your TDS deduction and helps you steer clear of getting your HRA exemption claim rejected. Although employees can still claim tax exemption for HRA during return filing, there will be a discrepancy between the salary income reported in Form 26AS by your employer and that mentioned by you in your return. Hence, the income tax department may seek clarification regarding the disparity.
6. Get your landlord’s declaration in case PAN is not available
In the event where your landlord is unable to provide you with his PAN, he/she should give a declaration as mentioned in circular No. 8/2013, dated 10 October 2013. You need to submit both the declaration and Form 60—duly filled by the owner—to your employer in order to enjoy the benefits of HRA exemption.
7. If the monthly rent exceeds Rs.50,000, deduct 5% TDS from the same before paying it to the landlord
A TDS of 5% has to be deducted from the rent you pay to the property owner if the same exceeds Rs. 50,000 every month. If you forget to deduct the required TDS from the rent, you would be required to pay an interest @ 1% p.m. In case you do deduct the TDS but forget to deposit the same on time; an interest @ 1.5% p.m. would be applicable. You may also have to pay a fine of Rs.200 per day throughout the delayed period. Moreover, if your landlord is an NRI, you must deduct a TDS of 30% before paying rent.
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8. Make certain that you occupy the same property as mentioned in the agreement
It’s mandatory to occupy the same accommodation as mentioned in the rent agreement. If your parents are the landlords, they too should mention the rental income at the time of income tax return filing.
9. Mention the exact amount to be paid as rent in the rent agreement
In case you pay higher rent than what is mentioned in the rent agreement—where you pay mentioned rent via banking channel and the excess through cash—tax exemption will be considered based on the rent receipt. The excess amount will not be taken into consideration by the employer for the purpose of HRA exemption.
You can avail HRA exemption benefits only if you are residing in rented accommodation. The allowance otherwise comes under your taxable income. Also, tax exemption under HRA is no longer available if you have settled for the new tax regime which is in effect from the FY 2020-21 (AY 2021-2022). Click here to find more information on HRA exemptions.