For tax relief, you need proof of rent paid to kin
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Lubna Kably
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Mumbai
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Recently , the Mumbai income
tax appellate tribunal denied a claim on house rent allowance by a
taxpayer.She had paid rent in cash to her mother, but was unable to
substantiate it. On the other hand, the Ahmedabad ITAT allowed the HRA
exemption claimed by a taxpayer who had paid rent to his spouse.
Given that the avenues av
ailable to save tax are limited for the salaried class, some employees
try and take the `fullest' advantage of the income
tax exemption available for HRA by paying rent to a family member with
whom they are residing. It is another matter if the rent is actually
paid to the relative, or if the rent receipts are genuine.
Where do these seemingly contrary ITAT decisions leave the taxpayer? The bottom line is it isn't illegal to pay rent to a close relative, but it carries a risk of a deeper probe by the I-T officials and if genuineness cannot be proved, the claim would be denied, with attendant consequences. Under section 10 (13A) of the I-T Act, a salaried taxpayer can claim exemption on HRA for an accommodation occupied by him, if the property is not owned by him and he has actually incurred rent expenditure on it.
Amarpal S Chadha, partner, people advisory services at EY-India, says: “Payment of rent to a parent or spouse will not impact the eligibility to claim HRA exemption as long as the above mentioned conditions are met and the transaction is genuine.“ “The transaction should not be a mechanism to avoid tax,“ he stresses. So decisions by the Mumbai and Ahmedabad ITATs -one accepting the tax exemption claim on payment of rent to a relative and the other denying it -may seem contrary , but the orders were based on specific facts in each case.
Rent paid to spouse, HRA claim allowed: In 2013, the Ahmedabad ITAT bench in Bajrang Prasad Ramdharani's case, allowed an HRA exemption claim by the taxpayer, even though rent was paid by him to his spouse. He was living with his wife but paid her rent via bank transfers. The ITAT held that the taxpayer had fulfilled the twin requirement of occupying a house not owned by him and payment of rent.
Rent paid to mother, HRA claim disallowed: But more recently, the Mumbai bench disallowed the HRA claim by Meena Vaswani who had contended that she lived with her aging mother to take care of her and paid rent to her mother in cash.While rent receipts were obtained by her, as the transaction was with her mother, she had not entered into any formal contract. Vaswani was not able to produce proof of cash withdrawals from her bank to substantiate the rental payments.Moreover, the authorities were able to prove that she was not residing with her mother, but in another apartment nearby with her husband and daughter. The ITAT agreed with I-T authorities that the transaction was a sham to obtain a tax benefit.
Where do these seemingly contrary ITAT decisions leave the taxpayer? The bottom line is it isn't illegal to pay rent to a close relative, but it carries a risk of a deeper probe by the I-T officials and if genuineness cannot be proved, the claim would be denied, with attendant consequences. Under section 10 (13A) of the I-T Act, a salaried taxpayer can claim exemption on HRA for an accommodation occupied by him, if the property is not owned by him and he has actually incurred rent expenditure on it.
Amarpal S Chadha, partner, people advisory services at EY-India, says: “Payment of rent to a parent or spouse will not impact the eligibility to claim HRA exemption as long as the above mentioned conditions are met and the transaction is genuine.“ “The transaction should not be a mechanism to avoid tax,“ he stresses. So decisions by the Mumbai and Ahmedabad ITATs -one accepting the tax exemption claim on payment of rent to a relative and the other denying it -may seem contrary , but the orders were based on specific facts in each case.
Rent paid to spouse, HRA claim allowed: In 2013, the Ahmedabad ITAT bench in Bajrang Prasad Ramdharani's case, allowed an HRA exemption claim by the taxpayer, even though rent was paid by him to his spouse. He was living with his wife but paid her rent via bank transfers. The ITAT held that the taxpayer had fulfilled the twin requirement of occupying a house not owned by him and payment of rent.
Rent paid to mother, HRA claim disallowed: But more recently, the Mumbai bench disallowed the HRA claim by Meena Vaswani who had contended that she lived with her aging mother to take care of her and paid rent to her mother in cash.While rent receipts were obtained by her, as the transaction was with her mother, she had not entered into any formal contract. Vaswani was not able to produce proof of cash withdrawals from her bank to substantiate the rental payments.Moreover, the authorities were able to prove that she was not residing with her mother, but in another apartment nearby with her husband and daughter. The ITAT agreed with I-T authorities that the transaction was a sham to obtain a tax benefit.
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