AIS can eliminate all bogus HRA exemption claims

One of the interesting and important items included in AIS is the rental income of the landlord. AIS is now showing rental income for those who have given their property to another taxpayer; Which in turn is claiming HRA exemption for the rent paid to the landlord. Let’s understand how it works. To allow HRA exemption, the employer is required to submit the PAN of the landlord from the employee where the monthly rent paid by the employee is higher 8,000 This information is then furnished by the employer in the TDS return filed by him in Form 24Q as required under section 192 of the Income Tax Act.

Let us understand this further with the help of an example. Suman, a resident of Delhi lives and works in Bangalore. Her employer has given her the option to claim House Rent Allowance (HRA). HRA is a significant part of the income of a salaried employee. Suman can claim tax exemption as per HRA rules if she lives on rent and pays rent.

All Suman has to do is to disclose to the employer that she wants to claim HRA exemption by submitting rent receipt. He also has to submit the rent agreement for the rented house. In case of excess monthly rent as per income tax rules 8,000, the PAN of the landlord has to be submitted to the employer. Suman pays 10,000 per month to Aruna, her landlord. She asks for a copy of her PAN card from Aruna and hands it over to her employer. His employer collects the same information from all the employees who claim HRA exemption if rent exceeds 8,000 per month. The employer then files the return of TDS deducted on salary by filing Form 24Q, where each of these PAN numbers of the landlords are reported, in cases where HRA exemption has been allowed.

When Aruna downloads her AIS from the Income Tax Department website, she can see the mention of rental income in it. She can no longer avoid reporting it in her income tax return.

The government has put in place several mechanisms to ensure that rental income is taxed. One of which was the introduction of Section 194I through Budget 2017. As per this change, persons paying rent to a resident of India (not covered under tax audit), where the rent is higher 50,000 per month, TDS is required to be deducted at 5%.

This amendment was made effective from 1 June 2017. Inclusion of rental income in AIS is now the final straw. It will also potentially curtail bogus HRA claims, where taxpayers provided PAN numbers or even fake PAN numbers of family members, considering it only a reporting requirement. Rental income will be plotted in that PAN in whatever PAN they report and if such income is not included in the ITR, it can become a reason for receiving an income tax notice.

On the other hand, a genuine person can get fake rental income in their AIS when they have not actually earned any such income. This can happen in a situation where someone has made a false declaration of HRA and submitted his PAN number by mistake as a landlord. Such taxpayers should submit ‘Feedback’ on AIS on the Income Tax e-portal, where they can claim such amount to be ‘wrong’.

The main objective of AIS is to allow pre-filing of ITR. As this form becomes stable and in due course, all the details related to various income, TDS, tax paid in it can be pre-filed in the income tax return of the taxpayer. It would be a good practice to review this form over some hot cocoa over the weekend.

Archit Gupta is the Founder and CEO, Clear.