Is a rental agreement necessary to apply for Housing Benefit Exemption (HRA) if you pay rent to your parents? Is it sufficient to provide supporting documents such as rent receipts, direct credit of the rent to the parents’ bank account or TDS (withholding tax) on the rent payments?

—Krishan Kumar

In accordance with the provisions of Section 10(13A) of the Income Tax Act 1961, exemption from Housing Allowance (HRA) is not available where the accommodation occupied by the assessee belongs or that the assessee has not actually incurred any expense for the payment. of rent. Based on the limited facts provided, we assume that the parents are the legal and financial owners of ownership of the home and that the home is not owned by the assessee. In addition, the assessee actually pays rent to the parents.

In accordance with the provisions of the Act, read together with the Income Tax Rules 1962, salaried persons are required to furnish specified details/evidence to the employer in Form 12BB in respect of claiming exemptions /specified deductions. For the HRA exemption, a person is required to provide their employer with their name, address and PAN (when the total annual rent paid exceeds 1 lakh) from the owner.

Additionally, since it is the employer’s responsibility to withhold appropriate taxes from the employee, they are required to collect sufficient documentation to verify the employee’s claims for exemptions/deductions. Although there is no specific list of required documents, the employer may also ask for details such as rental agreement, rent receipts, method of payment, etc., before authorizing this deduction. . In the absence of documents, this deduction may be denied at the withholding tax stage. In the event that this is denied, depending on the facts and merits of the case, one may claim the HRA deduction when filing tax returns. However, please note that the same can be further investigated by tax authorities.

In the event that the tax return is selected for review, the tax officer may also request documentary evidence (as they deem appropriate) regarding the claimed HRA. Therefore, it is advisable to keep the following documentation for the HRA request:

• Registered and notarized rental agreement, if applicable

• Rent receipts

• Payments through banking channels

• Cash payments backed by known sources/traceable to specific bank account withdrawals

• Disclosure of rental income in the owner’s ITR (including the owner’s PAN)

It should be noted that claiming HRA exemption in respect of rent payments made to parents/spouse/relatives may be subject to litigation, so it is important to keep adequate supporting documentation to substantiate the authenticity of such claims. transactions.

Parizad Sirwalla is Partner and Head, Global Mobility Services, Tax, KPMG India.

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