ITR filing: Claiming HRA to reduce tax outgo? Rent receipts alone may not suffice - why your claim can be rejected

House Rent Allowance (HRA) remains a common tax-saving benefit for salaried individuals. But recent scrutiny by tax officers shows that even well-documented claims can be rejected if the underlying transactions appear dubious or fail to show a clear money trail.

To claim HRA exemption under Section 10(13A) of the Income Tax Act, salaried individuals must receive an HRA component in their salary and submit relevant documents—such as rent receipts, agreements, and landlord details—to their employer, according to an ET report. While these are not required when filing the Income Tax Return (ITR), authorities can call for them during scrutiny.

The exemption is calculated as the minimum of:

• The actual HRA received,
• 50% of basic salary plus dearness allowance (DA) for those residing in metros (40% for non-metros), or
• Rent paid minus 10% of salary (basic + DA)

However, experts caution that proper paperwork alone doesn't guarantee approval.
The Income Tax Department has flagged several cases where rent was paid to close family members—such as a spouse or parent—raising doubts about the legitimacy of the arrangement.

“In order to claim HRA tax exemption, employees must provide proofs like rent receipts, a rental agreement, and, in some cases, landlord details like PAN if rent exceeds Rs 1 lakh annually,” said Suresh Surana, founder of RSM India, quoted in an ET report. “Even with proper documentation, disputes may arise if the tax authorities find discrepancies or non-compliance with legal provisions.”

One case cited by Tax2Win involved a salaried employee who submitted rent receipts and an agreement to show rent payments to his wife. The claim was disallowed because the wife had no other income source, and the transaction was deemed non-genuine.

In another instance, a taxpayer claimed Rs 2.52 lakh as HRA for rent paid to her mother. The rent was paid in cash and backed by hand-written receipts. But tax officers found that the taxpayer jointly owned a self-occupied flat nearby, claimed housing loan deductions on it, and listed the flat as her address across PAN, bank records, and her ITR. Her mother had not declared rental income and failed to respond to notices. The ITAT eventually ruled that the entire arrangement was a sham and disallowed the claim.

Quoting the tribunal's finding, Surana said: “Rent receipts alone are not sufficient. The taxpayer bears the onus of substantiating the genuineness of the claim through documentation, conduct, and a verifiable financial trail.”
Tax experts say rent paid in cash, without matching bank withdrawals, can be a red flag. Discrepancies between rent-related documents and Form 16, Form 26AS, or the Annual Information Statement (AIS) also increase the likelihood of rejection.

“If rent is shown to be paid to a close relative without an actual monetary transfer, it could be disallowed,” Abhishek Soni, co-founder of Tax2Win told ET. “To avoid rejection, taxpayers should maintain a valid rent agreement, PAN of the landlord, proof of rent payment through banking channels, and address proof of the rental property.”

Other red flags include inflated rent amounts, use of generic or duplicate receipts, and inconsistencies in address across documents. Claims made while owning a self-occupied home in the same city can also invite questions, especially without a reasonable explanation for renting.

“The AO is empowered to seek clarifications and reject the exemption if supporting evidence appears unreliable,” Surana added. “Salaried taxpayers must ensure their claims are backed by credible financial transaction---not just paperwork.”
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