Salaried individuals can avail tax exemption on house rent allowance (HRA) if they live in a rented house, pay rent, and possess the necessary valid documents. However, many people are unaware that their rent agreements should include specific clauses to ensure that their HRA tax exemption, claimed during income tax return (ITR) filing, is not rejected by the income tax department. This also applies to individuals paying rent to their parents. In this article, we will explore the important elements that your rent agreement should include to safeguard your HRA tax exemption.
Understanding HRA Tax Exemption for Rent Paid to Parents
Income tax laws do not prohibit individuals from claiming HRA tax exemption when paying rent to their parents. However, individuals must ensure they have valid proof, including documents and rent payment evidence, to claim tax exemption in their ITR. Additionally, parents must declare the rental income in their own income tax returns.
Key Clauses for a Rent Agreement
While the Income Tax Act, 1961, does not specify a specific format for a rent agreement to be eligible for HRA tax exemption, it is crucial to have sufficient evidence to prove eligibility. It is advisable to include certain clauses in the rent agreement to comply with income tax laws.
A rent agreement should include the names and addresses of both the tenant and the landlord. Including the PAN (Permanent Account Number) and Aadhaar number of both the tenant and the landlord in the rent agreement is considered a beneficial practice. It ensures that you have the landlord's PAN number available to claim HRA tax exemption from your employer, especially if the annual rent exceeds Rs 1 lakh. This way, you can still claim the exemption even if the landlord refuses to share a copy of their PAN card.
Legally Valid Agreement
The rent agreement should be legally valid, with signatures of witnesses, the landlord, and the tenant. Notarization of the agreement adds further validity. It is essential to execute the rent agreement on stamp duty paper as per the laws of the state where the rented house is located.
Mode of Payments and TDS on Rent
The rent agreement should mention the mode of payments and include clauses regarding TDS (Tax Deducted at Source) on rent, if applicable. Employers often require rent agreements as stronger documentary evidence compared to rent receipts for providing HRA deduction benefits while calculating TDS on salary.
Importance of the Mode of Payment
The mode of payment of rent is crucial for the landlord's perspective. Cash receipts exceeding Rs 2 lakh are prohibited for single-day transactions, single transactions, or transactions related to one event or occasion from a person. Violating Section 269ST of the Income Tax Act, 1961, by paying cash rent exceeding Rs 2 lakh in a financial year may result in penalties imposed by the income tax department.
Understanding TDS on Rent
If the monthly rent is Rs 50,000 or more, the income tax laws mandate TDS on rented properties. The tenant must deduct TDS at a rate of 5% under Section 194-IB of the Income Tax Act. This deduction occurs in the last month of the financial year or at the end of the last month of tenancy if the property is vacated during the financial year. Tenants can utilize their and the landlord's PAN instead of a Tax Deduction or Collection Account Number (TAN) for deducting tax under this section.
Collecting Rent Receipts
Even if individuals have a rent agreement to claim HRA tax benefits, it is important to collect rent receipts as well. Rent receipts serve as proof of rent payments made to the landlord. Rent receipts should include the landlord's name, address, amount paid, TDS deducted (if any), and the mode of payment (cash or electronic). In cases where monthly cash payments exceed Rs 5,000, affixing a revenue stamp on the receipt is advisable. Rent receipts act as additional evidence if the HRA tax exemption is questioned by income tax officials.
Claiming HRA tax exemption requires careful attention to the clauses included in your rent agreement. While the Income Tax Act does not provide a specific format for rent agreements, it is essential to ensure that your agreement includes the necessary elements discussed in this article. By understanding the requirements and adhering to the guidelines, you can safeguard your HRA tax exemption and avoid potential complications during income tax return filing. Remember to collect rent receipts as additional evidence of rent payments made to the landlord.
The author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Risk & Compliance, Credit Controls, Due diligence. Currently, the author is the founder and managing partner at RRL Global services.
Tags income tax