AIS can put an end to all bogus HRA exemption claims

In a bid to promote voluntary compliance and deter non-compliance, the income tax department has now made available an Annual Information Statement or AIS for individual taxpayers. The AIS is able to give a near complete view of a taxpayer’s financial dealings. This is a powerhouse of information that can be downloaded by logging in to https://eportal.incometax.gov.in/.  It includes details of a taxpayer’s savings account interest (along with bank account number), dividend income, transactions made in stocks, aggregate mutual fund transactions (not SIPwise), foreign remittance information and a whole lot of other details.

One of the interesting and important items included in the AIS is the rental income of a landlord. The AIS is now displaying rental income for those who have let out their property to another taxpayer; who in turn is claiming HRA exemption for the rent paid to the landlord. Let’s understand how this works. To allow HRA exemption, employers are required to collect PAN of the landlord from the employee where the monthly rent paid by an employee exceeds 8,000. This information is then submitted by the employer in the TDS return filed by them in Form 24Q as required under Section 192 of the Income Tax Act.

Let’s understand this more with the help of an example. Suman from Delhi lives and works in Bengaluru. Her employer has given her an option to claim house rent allowance (HRA). HRA is an important 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 that Suman has to do is to make a disclosure to the employer that she wants to claim HRA exemption by submitting rent receipts. She is also required to submit the rent agreement for the house that has been rented. As per the income tax rules, in case the monthly rent exceeds 8,000, the PAN of the landlord must be submitted to the employer. Suman pays 10,000 per month to Aruna, her landlord. She asks Aruna for a copy of her PAN card and submits it to her employer. Her employer collects similar information from all the employees who claim HRA exemption where the rent exceeds 8,000 per month. The employer then files a return of TDS deducted on salary by filing Form 24Q where each of these PAN numbers of 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 rental income mentioned in it. She can no longer avoid reporting it in her income tax returns.

The government has put several mechanisms in place to ensure rental income is offered to tax. One of which was the introduction of Section 194I via Budget 2017. As per this change, individuals (not covered under tax audit) paying rent to a resident of India, where the rent exceeds 50,000 per month, are required to deduct TDS at 5%.

This amendment was made effective 1 June 2017. The inclusion of rental income in AIS is now the final straw. This also will potentially draw a curtain on bogus HRA claims, where taxpayers provided PAN number of family members or even fake PAN numbers assuming it as just a reporting requirement. Whichever PAN they report, rental income will be plotted to that PAN and if such income is not included in ITR, it may become a reason for receiving an income tax notice.

On the other hand, a genuine person may find fake rental income in their AIS, when they have not actually earned any such income. This may happen in a situation where someone made a bogus declaration of HRA and submitted their PAN number erroneously as that of the landlord. Such taxpayers should submit a ‘feedback’ on AIS on the income tax e-portal, where they can claim such an amount to be ‘incorrect’.

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

Archit Gupta is founder and chief executive officer, Clear.

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