By CA Surekha Ahuja, Sandeep Ahuja & Co.
Introduction
As the income tax return (ITR) filing season for Assessment Year (AY) 2025–26 begins, salaried individuals intending to claim House Rent Allowance (HRA) exemption must take a legally sound and compliance-ready approach. While it is common to submit rent receipts, agreements, and landlord details for claiming exemption, recent assessment trends show that documentation alone does not guarantee acceptance.
With increased use of cross-verification tools such as AIS (Annual Information Statement), Form 26AS, and landlord PAN tracing, the Income Tax Department is likely to scrutinize HRA claims more rigorously—especially when the rent is paid in cash, to close relatives, or when the TDS obligation under Section 194-IB has been overlooked.
This article provides a comprehensive guide on claiming HRA confidently while meeting all related legal and procedural requirements under Sections 10(13A) and 194-IB of the Income-tax Act, 1961.
HRA Exemption under Section 10(13A)
Under Section 10(13A), a salaried employee receiving HRA as part of their salary can claim exemption, provided they pay rent for a residential accommodation that is not owned by them. The exemption is calculated as the least of the following three amounts:
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Actual HRA received
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50 percent of salary (basic plus dearness allowance forming part of retirement benefits) if residing in a metro city (Delhi, Mumbai, Kolkata, Chennai); 40 percent for other cities
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Actual rent paid minus 10 percent of salary (basic plus qualifying DA)
A written rent agreement, rent receipts, landlord PAN (if rent exceeds ₹1 lakh annually), and bank proof of payment are key supporting documents. However, they must also withstand legal and factual scrutiny.
Why HRA Claims Are Denied Despite Document Submission
Taxpayers often believe that submission of rent receipts or rent agreements suffices. However, several judicial precedents and scrutiny assessments reveal that claims can be disallowed where the arrangement appears contrived or unsubstantiated. Key risk factors include:
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Rent paid to spouse or parents: Transactions with close relatives attract higher scrutiny. Absence of genuine tenancy, independent rent payment trail, and rental income reporting by the recipient can result in disallowance.
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Cash payments without banking proof: Payments made in cash, even with receipts, are often disregarded unless supported by cash withdrawal trail or consistent monthly patterns.
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No registered agreement: Absence of a formal agreement reduces legal enforceability and raises doubts on the legitimacy of the arrangement.
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Address mismatch: Discrepancy in addresses across PAN, Aadhaar, employment records, and ITRs can lead to questions about the actual place of residence.
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Own house in the same city: If the taxpayer owns a house nearby, the rationale for staying on rent must be reasonable and supported by facts.
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Landlord not disclosing rent income: If the landlord’s AIS or ITR does not reflect rent income, the claim may be questioned during scrutiny.
Illustrative Judicial Precedents
Rent paid to spouse
In multiple scrutiny cases, even with rent receipts and agreements, HRA exemption has been denied where the spouse had no other income, the payments were made in cash, and no registered lease existed.
Rent paid to mother
In a notable ITAT case, a salaried taxpayer claimed ₹2.52 lakh as HRA paid to her mother. However, she also co-owned a flat nearby and claimed interest under Section 24(b). There was no lease deed, no bank payment, and her address in official documents did not match the claimed rental premises. The Tribunal held that the arrangement was fictitious and disallowed the exemption.
Compliance Requirements under Section 194-IB
Section 194-IB applies to individuals or HUFs who are not subject to tax audit under Section 44AB and who pay rent exceeding ₹50,000 per month to a resident landlord.
Key legal requirements include:
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TDS must be deducted once in a financial year at the time of paying rent for the last month (typically March) or at the time of vacating the property, whichever is earlier.
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TDS rate is 5 percent if rent is paid on or before 30 September 2024; and 2 percent if paid on or after 1 October 2024 (as amended by Finance Act, 2024).
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Deducted TDS must be deposited through Form 26QC within 30 days of deduction.
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Form 16C (TDS certificate) must be issued to the landlord within 15 days of filing Form 26QC.
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PAN of both tenant and landlord must be quoted. TAN is not required.
Illustration:
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Monthly rent: ₹60,000
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Annual rent: ₹7,20,000
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Deduction in March 2025
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TDS at 2%: ₹14,400
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Form 26QC due by: 30 April 2025
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Form 16C due by: 15 May 2025
Rent Paid to Co-owners: Threshold Applicability
As clarified by CBDT Circular No. 8/2017, the ₹50,000 per month threshold under Section 194-IB applies per payee, not per property.
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If rent is paid as ₹30,000 to each of two joint owners, 194-IB does not apply.
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If ₹55,000 is paid to one co-owner, the TDS obligation under 194-IB applies on that share.
Compliance Matrix: HRA vs Section 194-IB
| Requirement | For HRA Exemption | For Rent TDS (Section 194-IB) |
|---|---|---|
| Valid Rent Agreement | Strongly Recommended | Recommended |
| Monthly Rent Receipts | Required | Preferable |
| PAN of Landlord | Required if rent > ₹1 lakh | Mandatory |
| Bank Proof of Rent Payment | Strongly Advised | Required |
| Form 26QC Filing | Not Applicable | Mandatory within 30 days |
| Form 16C Issuance | Not Applicable | Mandatory within 15 days |
| Address Consistency in Official Records | Important | Important |
| AIS or ITR Match of Rent Income | Strengthens Claim | Validates Deduction |
Consequences of Non-Compliance
| Default | Consequence |
|---|---|
| Weak documentation for HRA | Scrutiny, disallowance, tax demand |
| TDS not deducted under 194-IB | Assessee-in-default under Section 201 |
| Delay in Form 26QC filing | Late fee ₹200 per day (Section 234E) |
| Delay in TDS deposit | Interest at 1.5% per month (Section 201A) |
| Mismatch in AIS/26AS | Automated scrutiny or notice |
| Landlord rent not disclosed | Disallowance due to credibility gap |
Conclusion
For AY 2025–26, the Income Tax Department is expected to use advanced tools and cross-data validation to identify artificial or non-genuine HRA claims. While rent receipts and agreements are essential, taxpayers must also ensure financial credibility, documentation consistency, and statutory compliance—particularly under Section 194-IB for high-value rents.
A claim is only as good as its underlying evidence. To ensure your HRA exemption withstands scrutiny, the arrangement must be legally valid, financially transparent, and procedurally compliant.
