Taxpayers beware! Income tax department uncovers HRA fraud using fake PAN | How to avoid I-T action

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New Delhi: The Income Tax department has uncovered alleged fraud committed by taxpayers who were not tenants claiming tax deduction for house rent allowance (HRA) by furnishing fake PANs. The I-T department discovered 8,000-10,000 such cases. The declarations amount to Rs 10 lakh or more.

How did income tax department uncover rent receipt fraud?

I-T officials pursued a case in which rent receipts worth Rs 1 crore had been furnished for HRA claims. When they confronted an individual about the rental income, they said they no knowledge about it and they had not received any rent. The I-T department then went on to probe PAN used in other filings and uncovered that it was common to furnish fake PANs for HRA claims, the TOI reported. In some cases, employees have shared the same PAN seeking tax deduction.

What will the income tax department do next?

The income tax department plans to go after these individuals who have furnished fake PANs. While the mode of pursuit is unclear. To be sure, the Income Tax Act allows tax deduction at source for monthly rent exceeding Rs 50,000 or annual rent payments exceeding Rs 6 lakh. This has prompted individuals to use this provision to avoid tax payments on rental income.

What is HRA?

HRA is a salary component which can be taxed. However, HRA can be kept tax-free if you live in a rented accommodation. For this, taxpayers are required to furnish valid rent receipts with a notarised rent agreement.

HRA exemption is allowed up to 50 per cent of the total salary for metro cities and 40 per cent of the salary for non-metro cities. Salaried tax[ayers can claim HRA exemption up to Rs 1 lakh without furnishing the landlord’s PAN Card. However, for higher rent paid, it is mandatory to share your landlord’s PAN so that there is traceability of money being paid and credited into the latter’s account.

How to save tax on rental income?

Taxpayers who draw rental income are not required to pay any tax on income up to Rs 2.5 lakh. Overall, 30 per cent of the rental income is tax exempted while the remaining 70 per cent is taxable under the Income Tax Act.

Who is responsible for fake HRA claims?

The onus to ensure transparency in HRA claims falls upon the employee and not the employer. The employer is required to receive the claims and supporting documents. The latter is not required to probe into the claims.

It is the employee’s duty to ensure that the HRA receipts and the PAN attached are correct. There are some instances where companies have terminated the services of their employees for sharing fake documents in support of HRA claims, the TOI reported.

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