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Ensure your house owner will furnish a PAN
November, 22nd 2013

Software developer Ashu Chawla pays Rs 30,000 towards, but has been able to claim house rent allowance (HRA) exemptions only half the amount of Rs 15,000. Chawla, who has been staying a rented apartment for over two years now, has received an acknowledgment from her landlady for the amount she pay's through cheque. But Chawla has been hit by a huge tax-deduction from her employer, and hence is now planning moving to another rental apartment, she says.

Ashu's is not an isolated example. Many individuals staying in rented apartments could be faced by higher tax-deductions as the IT department. A recent circular issued last month by the Central Board of Direct Taxes (CBDT) has mandated that tenants will have to produce their landlord's Permanent Account Number (PAN) for HRA exemptions of Rs 1 lakh or more annually, which works out to a rent of Rs 8,333 or more monthly. In other words, if you are paying a rent of more than Rs 8,333 per month, you must furnish the PAN details of your landlord to your employee.

Two years back, the Board had issued a similar circular asking taxpayers to produce a rent agreement or PAN card of the landlord if the monthly rent exceeded Rs 15,000 a month, or Rs 1.80 lakh or more annually. With the recent circular, the CBDT has further tightened the norms for deductions at source, which will affect rent payers even below the Rs 1 lakh per annum bracket.

The CBDT circular says that if a tenant is not able to produce his/her landlord's PAN, he/she must submit a declaration to this effect from the landlord along with the name and address of the landlord at the time of claiming HRA exemption. It should be signed by the landlord, with a valid identity proof such as passport details, ration card or voter's card. A copy of the declaration should be given to the tenant.

However, there could be cases where the landlord refuses to help with PAN details or a declaration. “In that case, an employer may reject the HRA claim due to lack of documentation as mentioned in the circular,” says Amarpal Singh Chadha, tax partner at EY. That is, an employee will have to forego the HRA benefit. This circular is issued for employers, who are not suppose to provide the HRA benefit without getting the documents asked for.

Further, landlords will also have to keep an account of the payments received. Sometimes, family members pay rent to their parents. Now such landlords need to be more careful. Payment of HRA can be traced through their spouse or parent's PAN numbers. As a result, taxes will have to be paid on such rentals by the recipient, depending on the Income Tax slab in which the landlord comes under.

If the document is not furnished before the due dates for filing proofs on tax-saving investments, that is, February 2013, the HRA benefits may be withdrawn, because there are no alternatives provided in the circular if the documents are not provided. Hence, it will make sense to rent a place where the landlord is open to providing documents.

However, the Income Tax Act has no amendment to this effect, says Gautam Nayak, partner at Contractor, Nayak & Kishnadwala Chartered Accountant. "Because, the law or the Income Tax Act does not prohibit anyone from getting HRA benefits in the absence of landlord's details," he says. Hence, circular does not specifically say the employee's HRA cannot be honoured in the absence of such documentation.

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