Exemption for House Rent Allowance: Get the Landlord’s PAN or Declaration, or Face Greater Tax Scrutiny..

Employees will either have to get the landlord’s PAN or declaration, or face greater tax scrutiny

by Mr. Shyamal Banerjee

Income tax exemptions are available to taxpayers based on the applicable provisions contained in the Income Tax Act (the Act), and wherever so specified in the relevant provision of the Act, subject to relevant requirements specified in the Income Tax Rules (the Rules).

Can an income tax exemption be denied to a taxpayer by laying down an additional requirement not contained in either the Act or the Rules, but by issuing a circular or / an instruction?

That is the issue faced by many salaried employees in relation to exemption for house rent allowance (HRA).

Every year, the Central Board of Direct Taxes (CBDT) issues a circular explaining the applicable provisions of the Act and Rules relating to tax deduction at source (TDS) from salary people.

Most employers follow the provisions of this circular while determining tax to be deducted at source from employees. This year, a similar circular was issued on 10 October, 2013 explaining the relevant provisions for the financial year 2013 -14.

The amount of HRA exemption depends upon the rent actually paid by the employee. The circular clarifies that, in respect of HRA, if annual rent paid by the employee exceeds Rs.1 lakh per annum, it is mandatory for the employee to report Permanent Account Number (PAN) of the landlord to the employer.

In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employee.

A similar requirement was there in CBDT circulars issued for financial years 2011-12 and 2012-13, where the limits were Rs.1.8 lakh and Rs.2 lakh, respectively.

HRA Limits Requirement for PAN

Year               Limit

2011-12 -  Rs.1.8 lakh

2012-13 -  Rs.2 lakh

2013-14  - Rs.1 lakh

If one examines the provisions of the Act and the Rules, one does not find any such requirement either in section 10(13A) which grants the exemption, nor in rule 2A which lays down the limits of the HRA exemption.

Further, section 139A(5) makes it mandatory to quote the PAN in certain transactions. The transactions for this purpose, which are listed in rule 114B, does not include a transaction of renting a property, though it includes a transaction of sale or / purchase of immovable property valued at Rs. 5 lakh or / more.

Therefore, the statement in the CBDT circular that quoting of PAN is mandatory where the annual rent exceeds Rs.1 lakh does not seem to be supported by the law.

What are the implications of this?

Though the law has been laid down by the Supreme Court that CBDT circulars, to the extent that they are not in accordance with the law, do not bind taxpayers but are binding on tax officers, most employers deducting TDS from employee salaries would not want to face the risk of possible TDS demands and litigation with the tax department.

Employers would prefer to err on the side of caution and deduct TDS where such PAN or declaration of the landlord is not available as per the circular, as for them, TDS has no cost or income implications, they are merely being agents in recovering taxes from employees and paying it to the government.

Further, a decision of the Supreme Court had taken a view, in the context of leave travel allowance (LTA), that employers were not required to obtain proofs of expenditure of travel, unless required to do so by the Act, the Rules or /  by a circular. Therefore, given the requirement in the circular of obtaining the PAN, employers are likely to insist on the PAN or declaration of the landlord before they consider the HRA exemption for TDS.

TDS is, however, only an interim taxing arrangement, and the final tax liability has to be determined on filing of the income tax return. An employee is still entitled to the benefit of the exemption, notwithstanding the fact that he/ she may not have the PAN of the landlord, since there is no such condition in law. He/ She can therefore claim such exemption while filing her income tax return.

The practical aspect however is that, since the employer has not shown the exemption, while the employee has claimed the exemption, her tax return has a higher likelihood of being selected for a more detailed scrutiny at the time of assessment.

At that point of time, the employee would need to prove the genuineness of the rental arrangement, and the quantum of rent that she has paid, in order to claim the benefit of the HRA exemption.

In some places like Mumbai, where leave-and-licence agreements are required to be compulsorily registered with the Registrar, the absence of a registered agreement may hamper the claim for exemption.

The reality therefore is that employees will either have to obtain the landlord’s PAN or declaration, or else face greater tax scrutiny. This will certainly help curb bogus claims for HRA exemption, but at the same time, put many employees in genuine cases to the hardship of having to explain to their landlord as to why they require his/ her PAN when there is no law requiring her to furnish it.

One wishes that the law is synchronised with the practice in such cases, so that such avoidable situations do not arise.

Mr. Gautam Nayak is a chartered accountant.

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