HRA fraud: The IT department discovers widespread PAN abuse for tax advantages

The Income Tax Department has uncovered a significant number of cases where individuals have fraudulently utilized Permanent Account Number (PAN) cards to falsely claim House Rent Allowance (HRA), despite not being tenants.

Reports from The Times of India indicate that authorities have detected around 8,000 to 10,000 major cases, with many instances involving falsely claimed HRA amounts exceeding Rs 10 lakh.

This investigation gained momentum after the tax department encountered rent receipts totaling approximately Rs 1 crore linked to a single individual's PAN. Further inquiry revealed that the individual was unaware of these transactions and did not receive the attributed rent.

While fraudulent use of PANs has been encountered in the past, the scale of abuse has reached concerning levels. Instances have surfaced where employees from certain companies exploited identical PANs to avail tax benefits.

Tax officials are actively pursuing individuals who have filed fraudulent claims to reduce their tax liabilities. However, it remains unspecified whether legal action will be taken against offenders.

This situation underscores the potential misuse of PAN cards. Complicating matters is the existing rule for Tax Deducted at Source (TDS), which applies only to monthly rents exceeding Rs 50,000 or annual payments surpassing Rs 6 lakh. Consequently, many salaried employees have exploited this gap to evade taxes on rental income.

Tax experts caution against engaging in such schemes, as authorities can easily detect such misuse through automated processes, data analytics, and advanced technology. Individuals involved in fraudulent tax-saving practices may face substantial penalties, interest charges, and legal consequences.

Regarding House Rent Allowance (HRA), it is a component of the salary provided by employers to individuals, offering specific tax advantages. To qualify for HRA tax benefits, one must be a salaried employee residing in rented accommodation and paying rent. Self-employed individuals are ineligible for HRA tax benefits, and these benefits are applicable only to those opting for the old tax regime.

The tax-exempt portion of HRA is calculated based on the lowest of three amounts: actual HRA received from the employer, annual rent paid minus 10% of salary, or 50% of basic salary (for metro cities) or 40% of basic salary (for non-metro cities).

To claim tax exemption on HRA, employees must provide documentary evidence of rent payment, such as rent receipts or a rental agreement, to their employers. Formal rental agreements should include details such as rent amount, tenancy duration, and other terms and conditions.

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