When filing income tax, employees paying house rent must take several precautions. Making house rent payments partially in cash and partially online can lead to issues.
In such cases, the house owner might not provide a rent receipt or may not declare the rent payment in their income tax returns to avoid taxes.
This could result in income tax notices and rejection of House Rent Allowance (HRA) claims, as every HRA claim must be supported by a receipt from the house owner, similar to a bill payment.
Tenants must communicate openly with their House Owners. If the house owner accepts cash payments without declaring them in their income tax filings, it can cause further problems for the tenant.
The tenant may receive notices from the income tax department. Most house owners do not report cash rent payments in their income tax filings and often prefer to receive rent in cash to avoid taxes.
Claiming HRA based on cash payments will likely lead to rejection, as the employer may still need to file the Income Tax Returns (ITR).
Transparency in rent payments is key. If the tenant makes rent payments through online transfers and cash, the House Owner might report only the online payments in their ITR while not disclosing the cash payments.
In such a situation, even if the tenant claims HRA, it might be rejected if only half the payment is filed by the employer. Additionally, the income tax department may disallow an HRA deduction if the claimed rent exceeds the income shown by the employer.
According to Section 269 of the Income Tax Act 1961, receiving Rs. 2 lakh and above in cash is prohibited, and violations are punishable by penalties.
Landlords may accept rent in cash within the limits of this section, but they must fully report it to the Income Tax Department. Failure to do so can lead to trouble for both the house owner and the tenant.
The House Owner must issue a PAN card when the annual rent exceeds Rs. 1 lakh. With a PAN card, the House Owner will consider the HRA deduction when calculating TDS, affecting any additional tax deductions applicable to the tenant.