To save some extra tax, many taxpayers, in their Income Tax Return (ITR), show that they are staying in rented accommodations by paying a monthly rent of around Rs 8,300, and claim the tax benefits on House Rent Allowance (HRA) by taking the advantage of the Income Tax rule that there is no need to disclose the PAN of one’s landlord for paying rent up to Rs 1 lakh per annum.
However, they refrain from declaring such things to their employers as the accounts department stringently demands the rent agreement and rent receipts to admit the claim and include it in Form 16.
As there is no need to submit any document while filing ITR, they take it for granted and either include the false claims of their own or in some cases pay a percentage of the tax saved to the person filing ITR on their behalf to make the false claims.
But things will change now, as from this year the format of Form 16 has been changed to make it in sync with the format of ITR, so that the two documents may be reconciled electronically after e-filing of Income Tax Return 2019-20 and system generated notices may be sent in case of any discrepancies.
"Issuing of new Form 16 is a good move and the major reason for all these changes is to ensure that Form 16 is in sync with the ITR Form, which will help the Income Tax Department in electronically matching the data reported in ITR with all the data which it has gathered from various sources," said CA Karan Batra, Founder & CEO of CharteredClub.com.
"The new Form 16 is very comprehensive and everything is required to be reported in this form. All allowances like HRA, LTA, Pension, Leave Salary etc are required to be reported in the form as separate items. If there is any item which is not disclosed in the manner prescribed-the Income Tax Department may not be able to reconcile everything and a notice may be issued electronically to explain the variance," he added.
So, in case you are not staying on rent or at least your employer is not revealing this in the Form 16, be prepare to get an Income Tax Notice from this year onward for declaring the same in your ITR.
Talking on the consequence of mismatch between Form 16 and ITR regarding HRA tax exemption, Batra said, "In such a case the claimant may receive a notice and will have to submit rent receipts, rent agreement and bank statement to claim the exemption."
The need of bank statement is to show the money trail that the rent is actually paid and is the most crucial evidence. This is because the rent agreement and rent receipts may be made quite easily with consent of another party, but unless you are actually paying the rent, it will be hard to fake the money trail.
There will be no problem for genuine claimants, as all the proper documents to support the claim will be in place, but for false claimants, it may turn out to be nothing but inviting trouble.
When asked what would happen if a serial offender of claiming false HRA exemptions fails to give convincing reply to tax notice, Batra said, "Previous benefits claimed would be reversed and huge penalties would be levied."
So, with the government taking serious steps to plug the loop holes, it’s better for your own good to stop making false HRA and other claims to get some extra tax benefits.