IT department eyes on fake HRA claim using illegal PAN

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In a recent revelation, the Tax Department has unearthed a sophisticated scheme where individuals deceitfully claimed Housing Rent Allowance (HRA) despite not being genuine tenants, exploiting their Permanent Account Numbers (PANs) for financial gain. This fraudulent practice has raised concerns, with at least 8,000–10,000 high-value cases amounting to a staggering Rs.10 lakh identified so far.

Understanding Housing Rent Allowance (HRA)

Housing Rent Allowance (HRA) is a component of an individual’s salary provided by an employer to meet rental expenses for accommodation. It serves as a tax-saving tool under Section 10(13A) of the Income Tax Act, 1961. Employees who reside in rented accommodations can claim HRA to reduce their taxable income.

Who Can Claim HRA?

Employees who receive HRA as part of their salary can claim it for tax benefits if they meet certain criteria:

  1. Salaried Individuals: HRA can be claimed by salaried individuals who live in rented accommodations and receive HRA as part of their salary package.
  2. Rent Payment: To claim HRA, the employee must actually incur rental expenses for residential accommodation.
  3. Rent Receipts: The employee must provide rent receipts as proof of payment towards rent.
  4. PAN of Landlord: If the annual rent exceeds Rs. 1,00,000, the PAN of the landlord must be provided by the employee.

The Deceptive Scheme

The discovery of this fraudulent scheme stemmed from the detection of fabricated rent receipts amounting to nearly Rs.1 crore attributed to a single individual. Upon investigation, it was revealed that the individual, whose PAN was associated with the reported “rental income,” had no knowledge of such transactions. Further scrutiny uncovered that the person had never received the rent mentioned in their name.

Exploitation of PAN for Tax Benefits

Delving deeper, tax authorities found a pattern of dishonest individuals misusing PANs to illegitimately claim tax deductions from their employers. Shockingly, instances have emerged where multiple individuals from certain companies exploited the same PAN for tax benefits.

Pursuit of Tax Evasion

The Tax Department is now actively pursuing those who submitted false claims, aiming to recover the evaded taxes. While the possibility of legal action against these individuals remains uncertain, it underscores the severity of the situation. This misuse of PAN highlights a prevalent issue where unsuspecting individuals fall victim to fraudulent activities without their consent.

Loopholes and Compliance Challenges

The current scenario is exacerbated by the fact that Tax Deducted at Source (TDS) is applicable only for monthly rents exceeding Rs 50,000 or annual payments surpassing Rs 6 lakh, providing a loophole for abuse. Consequently, numerous individuals have exploited this loophole to evade rental income taxes.

Regulatory Imperatives and Employer Responsibilities

PAN, being integral to most financial transactions, facilitates easy tracking of fraudulent claims by tax authorities through advanced technologies and automated processes. Those found guilty not only face delayed tax payments but also penalties, penal interest, and in severe cases, prosecution.

Furthermore, tax regulations stipulate that individuals renting from relatives must declare rental income on their returns, with payments made through official channels like checks or electronic transfers, not cash.

Tax officials emphasize that employers cannot be held liable for cases where multiple individuals cite the same PAN for rent payment. However, they stress the importance of employers implementing robust checks and balances to verify rent payments and ensure compliance with tax laws. Some companies even have policies mandating termination for employees found guilty of submitting fictitious claims for allowances like HRA or LTA.

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Pooja Gupta

CA Pooja Gupta (CA, ISA, having 15 years of experience. Educator and Digital Creator

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CA Pooja Gupta (CA, ISA, having 15 years of experience. Educator and Digital Creator

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