If you work in any company and live in a rented house, then you get an additional benefit of House Rent Allowance (HRA) along with your salary. This is an allowance that employed people use to get an exemption from income tax. But many people also evade tax by misusing this system.
What is House Rent Allowance (HRA)
HRA, i.e., House Rent Allowance, is a part of the salary that is given to the employee for living in a rented house. If you really live in a rented house and you have a rent agreement, proof of payment (such as a bank transaction or receipt), then you can claim income tax exemption on it.
It is calculated on the lower of three things.
1. Actual amount of HRA
2. 50% of your salary (if you live in a metro city) or 40% (non-metro)
3. Rent minus 10% of salary
How is it misused?
Many people misuse this scheme of getting tax exemption. They get fake receipts made or show fake tenancy in the name of their relatives (such as parents). For example:
– A person is living in his parents' house, but shows that he is living on rent and is paying them money every month.
– Many times, there is no written agreement between the landlord and the tenant, yet the claim is made. Through these fake documents, people get tax exemption of thousands of lakhs of rupees annually.
What does the Income Tax Department do?
In recent years, the Income Tax Department has started keeping a close watch on HRA fraud. Now, there is a documentary verification of HRA claims of large amounts. If the rent is more than ₹1 lakh per annum, then a PAN number has been made mandatory. In many cases, the IT department has rejected the HRA claim and also imposed a penalty. HRA is a legal way to save tax, but its misuse is a legal offense. If you are living on rent, then keep the rent agreement and proof of payment. Otherwise, messing with fake documents can cost you dearly.
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