According to a latest incident, a taxpayer was denied the amount which she claimed for the House Rent Allowance (HRA) by the Income Tax Appellate Tribunal (ITAT). The rent was paid in cash by her to the mother, but she could not support this fact with any documents require for tax exemption. Ironic to this, another taxpayer was allowed the exemption in HRA even when the rent was paid to his spouse.
The fact remains that the salaried employees have very few ways to save the tax paid. And therefore, people take the maximum advantage possible out of these few ways which includes the exemption in HRA. They pay the rent to the kin with whom they are living and are able to enjoy the exemption available for HRA. However, the rent paid to the kin is genuine or not, is a totally different thing altogether.
But what option do these new decisions by the ITAT leave with the taxpayer? The fact remains that paying rent to a close relative or known is not considered illegal but what is risky is that, if the ITAT officials dig deep into the documentation and authentication process and if the taxpayer is not able to prove the authenticity, then the entire claim would be cancelled.
So, to remain safe and to enjoy the exemption available for HRA, one should follow some precautions while the rent is paid to a close relative. Proper documents for tax exemption or agreement should be prepared and signed by both the parties. Along with this, the payments in cash should be avoided and banking channels should always be preferred.