Income tax: 3 common mistakes while claiming HRA by salaried individuals for tax deductions

If you are employed, it is essential to be familiar with the House Rent Allowance (HRA) and take advantage of it. The HRA is a significant component of your salary provided to cover rental expenses. Salaried individuals must claim their HRA to avail of the tax benefits associated with it. However, to enjoy these tax benefits, you must actually be residing in a rented accommodation.

The deduction for HRA can be claimed under section 10(13A) of the Income Tax Act, and there is no specific limit on this deduction. The amount of deduction you can claim depends on your salary and the actual HRA received from your employer. If you reside in a rented house, you can avail of this tax deduction to reduce your taxable income. On the other hand, if you do not live in rented accommodation, you will not be eligible for the HRA tax benefit and will have to pay taxes on this allowance.

In summary, the HRA is a vital part of your salary, and claiming it appropriately can lead to tax savings depending on your rental situation and the amount of HRA received from your employer.

Salaried individuals frequently encounter three significant errors when claiming HRA, which can lead to trouble later on. To prevent any issues, be sure to steer clear of these mistakes.

Ignoring the need to have a rent agreement in place

If you reside in a house owned by a relative or family member and pay rent for it, you can still avail the benefit of the HRA. However, it is essential to have a rent agreement in place to validate the arrangement. If there is no formal rent agreement and your employer or the tax department raises concerns, you risk losing the HRA deduction benefit. Consequently, you may be required to pay taxes on the HRA amount in such a situation. To avoid any issues, ensure proper documentation and adherence to the HRA rules and regulations.

Paying rent beyond a certain amount in cash

If you live in a rented house, then transfer money from your account to the landlord’s bank account only. Rent should not be paid in cash. If you pay more than Rs 5000 in cash, then it is necessary to put a revenue stamp on every receipt. If you pay rent up to Rs 1 lakh in a financial year, then the PAN of the landlord is not required. The PAN number will have to be shared if the rent is paid more than that.

Not collecting rent receipt

Always remember to obtain a rent receipt from your landlord when you deposit the rent. While your employer can prepare the rent receipt, it may not be sufficient if the matter comes under scrutiny by the tax department. The tax department typically requires additional evidence to validate the rental arrangement.

In some instances, tenants may end up paying more rent than specified in the rent agreement. To accommodate the excess amount, tenants might resort to depositing additional cash. However, it's crucial to note that the benefit of the deduction for HRA will only be applicable to the amount for which you possess a valid rent receipt.

To ensure you can avail of the HRA deduction without any issues, make sure to have proper documentation for the exact amount specified in the rent agreement and supported by valid rent receipts.