As you are aware that reducing tax liability under provisions of applicable tax laws is our right and supported by our Constitution. However, tax evasion and avoidance are not allowed. You have the right to plan your transactions so that you will be able to reduce your tax liabilities by utilising various exemptions and deductions given under provisions of the Income Tax Act, 1961. Since the assessment, calculation and payment of the right income tax to the government is our duty and responsibility.
Since the salaried class is one of the big tax contributors to the exchequer. The Income Tax Act, 1961 has provided various exemptions u/s. 10 and deductions u/s. 80C, 24 etc. so that taxpayers reduce their tax liabilities judiciously.
One of the most important exemptions available for salaried personnel is House Rent Allowance which will drastically reduce their tax liabilities only after fulfilling some specified terms and conditions.[ Section10(13A)].
But this HRA exemption is one of the most abused exemptions today, people are submitting fake rent receipts, agreements etc. to claim HRA. The Income Tax Department has found various cases of claiming HRA on the basis of fake documents and hence taken firm steps to check tax leakage.
The Consequences of Fake Rent Receipts
Understanding the Risks and Legal Implications. It was observed that last year, some salaried taxpayers were investigated by the income tax department for submitting fake rent receipts from relatives. The department issued notices asking for proof of their tax exemption claims under Section 10 (13A). If discrepancies are found, the department can impose a penalty of up to 200% of the tax on the misreported income.
What are rent receipts?
Rent receipts act as the proof of rent payment from tenant to the landlord. These are also proof to claim tax deductions against against the HRA component of your salary. However, many cases are reported in the recent past, where employees produce fake rent receipts to claim the HRA benefit. This manipulation can have severe legal consequences.
Importance of rent receipts
A rent receipt serves as a critical document for tenants, providing proof of rent payment. It holds significant value, especially for claiming House Rent Allowance (HRA) exemptions and tax benefits. Here are some key reasons why rent receipts are essential:
1. Proof of Payment: Rent receipts are a formal acknowledgment from the landlord that rent has been paid, protecting the tenant in case of disputes.
2. Tax Benefits: Tenants can use rent receipts to claim tax deductions under HRA, reducing taxable income. If a tenant pays more than ₹1 lakh annually, providing the landlord's PAN details is mandatory to claim these benefits.
3. HRA Claims: For salaried employees receiving HRA, rent receipts must be submitted to the employer's HR or accounts department to qualify for tax exemptions.
4. Section 80GG Benefits: If the tenant doesn't receive HRA, they can still claim rent deductions under Section 80GG of the Income Tax Act, provided the rent exceeds a specified amount.
5. Online Rent Payments: With online rent payments, rent receipts serve as verifiable records for tax purposes.
What are fake/bogus rent receipts?
According to the IT Act 1961, HRA offered by the employer is not taxable, subject to eligible ceiling worked out based on Basic salary, HRA, and the actual rent paid by the employee. So, HRA helps in significantly bringing down the effective tax outgo of the employees. Some, people despite living in their own homes, produce bogus/ fake rent agreement and receipts for claiming the HRA benefit.
How fake rent receipts are generated
Tenants sometimes generate fake rent receipts using online rent receipt generators or by filling rent details in a rent receipt format and they sign it in the name of a bogus landlord to perpetrate it as an original receipt.
In some cases, employees who live in their own homes transfer the payments to their close relatives like brother or sister and get the rent receipt from them to claim the HRA benefit. Know that claiming HRA deduction in this case is legal for as long as you actually pay the rent to your parents or relatives and they pay income tax on the rental income thus generated.
PLEASE NOTE THAT: It is also mandatory to mention the PAN number of the landlord in the rent receipt if the rent payment is more than Rs 1 lakh in a year. In many cases, people who use fake rent receipts do not mention the PAN detail or they mention a wrong PAN detail, which gets revealed during the verification.
In some cases, employees submit the rent receipt to claim HRA calculation & HRA exemption even if they own a home in the same city.
Currently, there is no law that stops a person from staying on rent at their parents' or relatives' house. It is mandatory to furnish relevant documents validating the claimed tax exemption. However, many employees fake the rental agreement and rent receipt to claim HRA benefits.
PUNISHMENT FOR SUBMITTING FAKE RENT RECEIPTS
Using technology, the income tax department monitors your filings and will instantly issue a legal notice asking for proofs in case of any dubious deductions that have been claimed.
If you fail to submit any proof, the taxman will disallow the claimed exemption. But if the IT department finds your claims to be fake, it will result in penalties for misreporting or under-reporting of income.
The punishment for a fake rent receipt could be very severe and it could land employees into serious trouble.
LET US FIND OUT VARIOUS PUNISHMENTS FOR FAKING A RENT RECEIPT
The level of punishment for creating a fake rent receipt can vary, depending on the amount of rent and the type of forgery. Here are different types of punishments, for creating fake rent receipts:
Legal notice
On data mismatch, the department may send a notice seeking valid documents, initiate scrutiny, or cancel the HRA exemption.
The assessing officer can ask for proof of claimed tax deductions. If the person fails to submit the required documents, the authority may reject the claimed exemption. Further, such individuals may have to pay additional taxes, along with interests and penalties.
Up to 50% penalty on tenant
Under Section 270A of the I-T Act, 1961, the assessing officer has the right to impose a penalty of 50% if the income is under-reported by the assessee. This is applicable to a person who intentionally furnishes fake bills or receipts to misreport the income. Moreover, one is liable to pay interest as per sections 234A, 234B and 234C of the income tax act.
Up to 200% penalty on income under-reporting
If the income is under-reported, the department can levy a penalty of up to 200% of the tax applicable on the income misreported.
What is considered under-reporting of income?
A person is considered to have under-reported his income, if:
1. The income assessed is greater than the income determined in the return processed under Clause (a) of Sub-section (1) of Section 143.
2. The income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished.
3. The income reassessed is greater than the income assessed or reassessed immediately before such reassessment.
4. The amount of deemed total income assessed or reassessed as per the provisions of Section 115JB or Section 115JC is greater than the deemed total income determined in the return processed under Clause (a) of Sub-Section (1) of Section 143.
5. The amount of deemed total income assessed as per the provisions of Section 115JB or Section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been filed.
6. The amount of deemed total income reassessed as per the provisions of Section 115JB or Section 115JC is greater than the deemed total income assessed or reassessed immediately before such reassessment.
7. The income assessed or reassessed has the effect of reducing the loss or converting such loss into income.
What is misreporting of income?
Misreporting of income could be one of the following:
1. Misrepresentation or suppression of facts
2. Failure to record investments in the books of account
3. Claim of expenditure not substantiated by any evidence
4. Recording of any false entry in the books of account
5. Failure to record any receipt in books of account having a bearing on total income
6. Failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction
Verification by the income tax department
Here are various ways through which the IT department verifies rent receipts:
- Absence of rent agreement while HRA is claimed by providing the rent receipt
- Wrong or fake PAN details of the landlord mentioned in the rent receipt.
- Non-declaration of HRA benefit in Form 16 by the employer
- Employee has claimed HRA against rent receipt issued by a close relative in the absence of valid supporting documents.
On receiving the notice from the department, the employee must respond within the specified period. If the department has asked for a supporting document, it should be provided without any delay to substantiate the claim.
Further, the department has taken strict measures to tackle the incidents of HRA claims using fake rent receipts. It has introduced new ITR (income tax returns) forms that enable taxpayers to provide specific data of the allowances by selecting it from the dropdown column and the amended Form 16 to keep a tab on such malpractices.
According to the new system, allowances (such as HRA and LTA) must be specified separately in Form 16; thus, ensuring transparency in the system. For this, supporting documents must be submitted to disclose the financial transactions related to the rent that has been paid.
Artificial intelligence in fraud detection
The Income Tax Department has increasingly leveraged artificial intelligence (AI) to enhance its ability to detect fraudulent claims, including those related to fake rent receipts. AI systems are designed to analyze vast amounts of data quickly, spotting inconsistencies and anomalies that might indicate fraudulent activity. These systems can cross-check the information provided by taxpayers against multiple data sources, including transaction records and historical patterns.
How AI helps in identifying fake receipts
AI algorithms are programmed to recognize patterns and discrepancies that human reviewers might miss. For instance, they can flag instances where rent receipts or transactions do not match the declared income or where the PAN details of landlords do not align with the reported rent payments. By continuously learning from new data, AI tools become more adept at identifying fraudulent claims over time, improving the accuracy of the tax department's investigations.
Form matching and verification: Matching AIS Form, Form-26AS, and Form-16
The Annual Information Statement (AIS), Form-26AS, and Form-16 are crucial documents in verifying the authenticity of rent receipts and HRA claims.
- Annual Information Statement (AIS): AIS is a comprehensive statement that includes all transactions related to a taxpayer's PAN, including rent payments made and received. The Income Tax department uses this to track all financial transactions and ensure they align with the claims made by the taxpayer.
- Form-26AS: This form provides a detailed record of taxes deducted at source (TDS) and other tax-related transactions for a taxpayer. It is cross-checked with the information provided in the taxpayer's return to ensure accuracy.
- Form-16: This form is issued by employers and details the salary paid, including any HRA claims. It is used to validate the HRA deductions claimed by employees.
RESPONSIBILITY OF EMPLOYERS TO CHECK FOR FAKE RENT RECEIPTS
During verification of the tax returns, the tax department may ask the employer to provide valid proof for the tax deducted at source under Section 192 of the Income Tax Act and validate the authenticity of the documents submitted.
PLEASE NOTE THAT: Those who submit rent receipts to the employer without additional proof, for instance, rent agreement and payment proofs, may come under the HRA fraud investigation by the I-T department.
According to the Income Tax Appellate Tribunal (ITAT), these false HRA claims can be rejected under the principle of res gestae (the start-to-end period of a felony).
The assessee must produce any proof that arises during the routine hiring of premises such as;
i) Leave and license agreement,
ii) Lease Agreement/ Rent Agreement
iii) Letter to society notifying about his/her tenancy,
iv) Rent payment through bank,
v) Cash payments supported with verified sources,
vi) Cheque payments for electricity and water bills, any
vii) Correspondence arising during the tenancy period to establish that the transaction of hiring of premises was authentic and was taking place during the mentioned period.
THINGS TO KEEP IN MIND TO AVOID CHARGES RELATED TO FAKE RENT RECEIPT
Here are some important points to keep in mind to avoid charges related to fake rent receipts:
- Get a valid agreement from the landlord.
- Try to make rent payments online or through a cheque.
- Get the PAN details of the landlord mentioned on the rent receipt, if the rent payment is more than Rs 1 lakh in a year.
- The tenant should keep a record of utility bills paid by them.
- If the landlord is not holding a PAN, a declaration for the same should be taken along with duly filled Form 60.
- If the rent receipt is taken from a close relative, the details of the rent should be mentioned by them in their ITR and the details should match with your rent receipt.
CONCLUSION
Being a good citizen our duty is to pay true taxes to the government. The government has trust in its citizens and hence the self-assessment tax regime is applicable in India. The government has left on its citizens to assess their incomes, calculate tax liabilities under various provisions of income tax and pay the appropriate taxes to the government within the due date of payment. The government are going to replace the Income Tax Act, 1961 with Income Act, 2025. The Income tax Bill, 2025 has been approved by the Lower House and will become act soon and will be effective from 1st April 2026. This Bill, 2025 is easily understandable and the government focuses on ease of doing business and reducing tax litigation in India. The most important point to be noted is that do not use fake/fraudulent ways to reduce your tax liabilities, it will lead to more tax payments and penalties as well as imprisonment in some cases. So live ha appy life and pay your taxes.
DISCLAIMER: The article presented here is only for sharing information with readers. The views expressed here are personal views of the author, shall not be considered as professional advice. In case of necessity do consult with professionals for more clarity and understanding on subject matter.
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