HRA claims and documents: Filing income tax returns often involves claiming deductions or exemptions, such as House Rent Allowance (HRA). Recent media reports stated that the tax department was checking for fake HRA claims. However, the Central Board of Direct Taxes (CBDT) has clarified that there is no special drive to reopen cases related to HRA mismatches.
In a press release dated April 8, 2024, the CBDT clarified that there’s no special effort to reopen cases of mismatch. CBDT stated that concerns about retrospective taxation and reopening cases related to HRA claims are unfounded. The release mentioned analysing data in certain high-value cases of rent mismatches for the fiscal year 2020-21.
However, taxpayers should remain cautious. According to an ET report, if there’s a discrepancy between the rent paid and the rent received by the landlord, potential tax evasion issues may arise.
S. Sriram, Partner at Lakshmikumaran & Sridharan Attorneys (LKS), was quoted as saying, “The communication (April 8, 2024) from the CBDT is only a press release. It is not a statutory circular which would bind them. Wherever the Income-tax Authorities find that there is escapement of income, they are bound to examine them and bring the correct sums to tax.”

HRA claims: Which taxpayers should be concerned

Taxpayers making false HRA claims, whether intentionally or unintentionally, should be concerned about receiving a tax evasion notice from the income tax department.
For instance, if someone uses a fake rental agreement and receipts to claim false HRA, they are knowingly attempting to evade taxes.
Also Read | How to claim Leave Travel Allowance: Know eligibility, LTA rules, documents required and other key details
Mihir Tanna, associate director of direct tax at S.K Patodia LLP, shares an experience where a tenant unknowingly got into trouble with the tax department due to a false HRA claim, despite genuinely claiming it.
According to Tanna, tenants should anticipate a situation where the landlord denies receiving rent payments, potentially nullifying the tenant’s HRA claim and leading to trouble with the tax department. The tenant might receive a notice regarding this issue later on. Tanna cited examples where landlords who previously accepted cash rent payments may disassociate from the tenant when tax issues arise. Landlords should realize that the tax department can also pursue them for tax evasion if they receive rental income in cash without declaring it in their tax returns. Consequently, the tenant may face problems, as the tax department may suspect a false HRA claim, Tanna added.
Experts say that providing the landlord’s PAN details is necessary when the annual rent exceeds Rs 1 lakh. With this information, the income tax department can monitor both the landlord’s rental income and employees’ HRA claims. This applies to taxpayers receiving HRA in their salary and those who claim HRA directly when filing their tax returns.
S. Sriram says that the Income-tax Department’s scrutiny can encompass employees claiming HRA exemption through their employer and those seeking exemption in their tax returns. It may also involve individuals claiming rent as a business expense and those deducting tax under section 194IA without seeking any tax exemption.
Also Read |HRA exemption: Claiming House Rent Allowance tax benefit? Keep these 5 important documents handy in case income tax department asks
For the fiscal year 2021-22 (Assessment Year 2022-23), the deadline for filing an updated income tax return (ITR-U) is March 31, 2025. According to Sujit Bangar, founder of TaxBuddy, a tax filing assistance company, “You are advised to file ITR-U if you believe there is a discrepancy in the HRA allowance claimed by you to avoid scrutiny.”
Individuals who have a significant gap between rent paid and claimed, or those who directly claimed HRA during ITR filing without providing proof to their employers, should take note. Additionally, individuals who have claimed a substantial HRA amount during ITR filing but failed to submit proper documents to their employer or maintain rent agreements or receipts should be aware, Bangar stated.
When and why might the income tax department catch you?
Experts say that the income tax department can catch individuals for tax evasion. However, there are legal limits that restrict the tax department from revisiting old cases. Sriram explains that according to current law, cases under section 149 cannot be reopened beyond 3 years from the end of the assessment year, unless the undisclosed income exceeds Rs 50 lakh. For FY 2019-20 (corresponding to Assessment Year 2020-21), this 3-year period ended on March 31, 2024.
Sriram further added that currently, notices can be issued for fiscal year 2020-21 and onwards if the undisclosed income is less than Rs 50 lakh.
However, if the potential tax evasion amount is at least Rs 50 lakh, a notice can be issued beyond three years but within 10 years from the end of the relevant assessment year, according to Tanna.
The next question is whether the tax department is determined to catch potential tax evaders who might be using HRA to evade taxes, and if so, which cases would they target? According to CA Sandeep Agrawal, co-founder of TeamLease Regtech, a company specialising in regulatory and legal software solutions, the purpose of e-verification was to notify tax filers about discrepancies in rent and HRA. It’s possible that the CBDT may pursue tax recovery proceedings for cases with significant discrepancies instead of addressing every mismatch, considering the balance between tax recovery and the volume of cases to be managed after issuing recovery notices.
Who doesn’t need to worry about the tax department catching them?
Tanna advises that taxpayers don’t need to stress over HRA rent mismatches if they’ve claimed HRA as per their Form 16, and if their landlord has declared this rental income in their tax return.
“Sometimes, due to certain issues, employees can not submit documents supporting HRA claims and claim HRA in ITR. It may result in notice from income tax for verification of claim. This is not an income tax notice and if the employee can verify his HRA claim with proof, nothing will happen,” Tanna further explains.