House rent allowance: Tenants will get into trouble with the income tax department if they are paying rent in cash and the landlord does not offer it for income tax

Paying rent in cash without a rent receipt? Know why your HRA claim may be disallowed, and you may get an income tax notice For every claim of HRA there should be a corresponding income offerred for tax. Read here to know how a tenant got into trouble because of this

Paying rent in combination with cash and online transfer or only cash can prove to be a self-defeating act for a tenant. He or she may get an income tax notice and house rent allowance (HRA) may be disallowed. This is because, for every HRA claim, there must be a corresponding income offered for tax by the landlord. However, if a landlord who is taking rent in cash does not offer this for income tax, you could land into trouble with the tax department.

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As per Sujit Bangar, former IRS officer and founder of, "In India, generally, the amount received in cash is not reported in an income tax return. Most of the time, the purpose of taking rent in cash is to avoid income tax and subsequent reporting of such income in an income tax return."

Bangar shares a case study of a taxpayer who got into trouble with the tax authorities due to this very problem (landlord not declaring rental income received in cash). "Vinayak paid Rs 20,000 as rent every month, half in cash, half via online transfer. Tax season came and he claimed the full Rs 2.4 lakh (20,000 per month) as an HRA exemption. Fast forward to a few weeks- his HRA exemption was disallowed. What happened was, that his landlord didn't report the cash rent payment and only reported Rs 1.2 lakh (10,000 per month). This caused a mismatch between what Vinayak claimed as rent (Rs 2.4 lakh) and what was reported (Rs 1.2 lakh)," he says.

As per Bangar, this incident happened because Vinayak didn't know that - if the rent you claim is higher than what your landlord shows, the tax department may disallow a portion of your HRA exemption. "And that means paying more tax than expected," he says.

Is it forbidden for you to pay landlords rental payments in cash?

As per tax experts' tenants and landlords can deal in cash for rental payments, nothing is barring them from doing so, provided they follow the provisions of Section 269ST of the Income-tax Act, 1961.
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As per section 269ST, it is prohibited from receiving an amount of Rs 2 lakh or more in cash:
In aggregate from a single personIn respect of a single transaction; or In respect of transactions relating to one event or occasion from a person
"The penalty for failure to comply with the provisions of Section 269ST is a sum equal to the amount of such receipt," says Neeraj Agarwala, Partner, Nangia Andersen India, a tax and business consultancy company.

Hence as per the law, landlords can accept rental income in cash up to the limits specified in Section 269ST. However, the landlords have to offer this rental income for income tax.

What should you do if a landlord only accepts rental payments in cash?

Experts say that landlords who only accept rental payments in cash are most likely to not declare this income for tax and neither will they be willing to give their PAN number to you. But you still need the landlord's PAN number if the annual rent exceeds Rs 1 lakh as your employer will ask for it. If the landlord's PAN is not submitted, the employer will not consider the HRA exemption while calculating TDS, leading to an excess tax deduction from your salary.

Here what you should do in situations where either the landlord is not giving rent receipts or not sharing his/her PAN number:
Rent receipts and/or rental agreement not given by Landlord: Rent receipts are official documents provided by landlords to tenants upon receiving rent payment. Similarly rental agreements are also insisted upon by some employers. Sometimes it may also help prove the situation if there is any income tax scrutiny on you.

"While there are no restrictions or penalty levied on tenants to make payment in cash, however, a penalty is levied in the hands of the landlord for failure to comply with the provisions of section 269ST. In case the landlord does not provide the tenant a rent receipt the tenant may not be able to claim HRA exemption," says Agarwala.

"To claim HRA exemption under Section 10(13A) of the Income Tax Act, tenants need to provide proof of rent payment. Rent receipts and the landlord's PAN are essential documents for this purpose. Some employers also insist on the rental agreement for claiming HRA," says Priyanka Jain, Associate Partner, Vaish Associates Advocate.

Landlord is not giving PAN: "If the landlord refuses to share their PAN but the tenant has all the necessary documents to substantiate the rent payments, the tenant can still directly claim the HRA exemption in their income tax return and file for a refund of the excess tax deducted. However, this approach increases the likelihood of receiving a notice from the Income Tax Department, requiring the tenant to provide proof to support their HRA claim," says Agarwala.

What can happen to landlords if they accept rent in cash and do not show this in their ITR?

As per Agarwala from Nangia Anderssen India, the following are the consequences that a landlord can face when he/she takes a rental income but does not offer it for income tax:

Best Judgment Assessment: If the landlord doesn't file their income tax return (ITR), the assessing officer is empowered to make an assessment to the best of his judgment. This means the tax officer will estimate the taxpayer's income and tax liability based on the information available to him.Penal Interest: As per Section 234A, if taxpayers don't pay their taxes on time, they will be liable to pay an interest of 1% per month on the outstanding tax amount. Further, interest is leviable under Section 234B if there is a delay in the payment of advance tax.Prosecution: Landlords can even be jailed for this. Failure to furnish ITR can lead to prosecution if income tax liability exceeds Rs 25,000. This offense is punishable with rigorous imprisonment of a minimum of 6 months up to 7 years and a fine. In cases where the tax liability is less than Rs 25,000, the punishment can be rigorous imprisonment of a minimum of 3 months up to 2 years and a fine."Therefore, landlords must maintain transparency in their financial transactions to avoid such repercussions," says Agarwala.
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This story originally appeared on: India Times - Author:Faqs of Insurances