In the context of income tax, HRA stands for House Rent Allowance. It refers to the portion of a wage that is used to pay rent and is deducted from taxable income under section 10-13A. Salary would include basic, dearness allowance and fixed percentage of commission. It is used to cover the cost of housing up to a specific percentage of the employee’s salary. The government does not anticipate the employee to pay tax on this amount because it will be spent on housing, therefore the employee can claim a tax exemption for the HRA.
The employee must now provide specific data to the employer in order to claim tax advantages on pay income, as per Rule 26C of the Income Tax Act. The employee must complete and submit Form 12BB to his or her employer, including the name, address, and PAN of the property owner.
PAN card of landlord has become an extremely important factor to get exemption in HRA. However, it was not mandatory earlier.
To stop Employees to submit fake rent receipts in order to claim exemption the government released a new circular stating that PAN details had to be mentioned for HRS exemptions for amounts above Rs. 1,00,000. Sometimes they submit fake receipts that are higher than the amount they actually pay as rent to get HRA exemption. Later on, government observed that Landlords don’t Pay Tax on their rental income. So the government made it mandatory for renters to include the PAN details of the landlord in exemption claim form, so they can check whether landlord is declaring the rent as income when filing tax returns or not.
The need under Rule 26C to provide the Landlord’s PAN is limited for the purpose of the employer deducting tax at source on ‘Salary income.’ HRA exemption is still available under Section 10(13A) of the Income Tax Act of 1961. As per the Rule 26C of the Income Tax Act, it has become mandatory for the employee to furnish certain details to the employer for claiming the tax benefits on salary income. The employee needs to fill and submit Form 12BB to one’s employer, by mentioning the property owner’s name, address and the PAN.
The HRA exception is granted in the event that one or more of the following conditions are met.
- Actual HRA received by the employee.
- 40% of income if the leased property is in a non-metro city or 50% of salary if the rented property is in a metro city such as Mumbai, Delhi, Bengaluru, Chennai, or elsewhere.
- The actual rent paid was less than 10% of the wage.
- Only salaried individuals can claim for HRA.
- HRA cannot be claimed if you live in your own house property.
- HRA benefits can be claimed if you pay rent to your landlord or when living with parents under rental agreement.
- You can claim both HRA and Home loan interest.
- Documents such as Rent Agreement for the current financial year, duly stamped rent receipt and PAN card if the rent exceeds RS. 1,00,000 P.A are required for HRA Exemption
- If landlord does not possess PAN, still individual can claim tax deduction on HRA.
Things to consider to get deduction in HRA
- In order to claim a deduction for housing rent allowance, documents such as rent receipts and rental agreements must be provided to the employer. If the rent payment exceeds Rs 1 lakh per year, the house owner’s PAN must be provided. Employers will deduct HRA in Form 16 based on these proofs.
- Rent receipts are not required for paid employees earning up to Rs 3,000 per month in HRA. However, it is better to retain those for your own records as stated in CBDT circular no. 8/2013, dated October 10, 2013, as well as CBDT circular no. 20/2015, dated December 2, 2015.
- The employer must have a rental agreement and rent receipts before the end of the fiscal year in order to enable a deduction for the purposes of Form 16.
- The employee must submit the PAN number to the employer if the rent payment per year is more than Rs 1 lakh, i.e. more than Rs 8333 a month.
- If the case is selected for scrutiny, the employee should preserve all documentation evidence such as the lease agreement, rent receipt, and bank statement for proof of rent payment in order to verify HRA claims before the tax officer.
What to do to claim tax exemption on HRA without landlords pan
If you’re renting a property and paying more than Rs 8,333 per month, remember to have the landlord’s PAN or you’ll miss out on the HRA exemption.
If the landlord does not have a PAN, he or she must be ready to sign a declaration for you. It’s vital to do this before you sign a lease since it saves you the trouble of having to chase down your landlord for a PAN when it’s time to file your taxes.
If you pay more than Rs1 lakh in rent per year or Rs 8,333 a month but are unable to give the employer with the owner’s PAN, the HRA benefit will not be shown in the TDS since the employer would not be allowed to provide any such benefit.
However, the employee may claim the HRA tax advantage while submitting the ITR, which does not require the owner’s PAN. In the event of failure, the company will refuse HRA benefits while withholding tax from the employee’s compensation. However, the employee can still claim the HRA benefit when filing his income tax return.
Note- By doing so, there will be a discrepancy between the salary income reported on Form 26AS and what is reported on the ITR, one is likely to get a notification from the IRS. So, one should be prepared to provide evidence of the rent payment to the tax officer as there are chances to get a notice.