200% penalty for fake rent receipts, tax department warns

As the deadline for filing Income Tax Returns (ITRs) nears on July 31, 2023, the Income Tax Department has intensified its efforts to combat tax evasion using counterfeit rent receipts. This practice is predominantly observed amongst salaried individuals who claim tax exemptions for rent expenses up to Rs 1 lakh without providing their landlords' PAN details, as allowed by Section 10(13A) of the Income Tax Act. However, some taxpayers have been exploiting this provision, leading to a significant rise in dubious ITR filings.

In a comprehensive approach to verify the authenticity of such claims, the Income Tax Department has initiated a 360-degree profiling of individuals. This process involves scrutinising data from ITRs and cross-referencing it with information obtained from external sources, including verification from taxpayers themselves, as shared by Amit Gupta, MD, SAG Infotech.

Taxpayers identified with potential irregularities in their ITRs may receive notices from the tax department, requiring them to provide evidence to substantiate their tax exemptions. In cases where under-reporting of income is discovered, the tax department holds the authority to impose penalties of up to 200 per cent of the tax applicable on the misrepresented income.

Compliance measures for rental expenditure

To ensure compliant tax filing and avoid potential repercussions, tax experts advise taking crucial steps when dealing with rental expenditure. "It is essential to have a valid rental agreement that is duly registered with the homeowner. This agreement serves as vital documentation to authenticate rent-related tax exemptions and validates the legitimacy of the rental arrangement," said Arpit Suri, CA and personal finance expert.

Tax department tightens grip on fraudulent returns with bogus rent receipts | Image credit: Shutterstock

Tax experts also recommend preferring online or cheque-based rent payments instead of cash transactions. "Opting for digital or cheque payments ensures a transparent and traceable record of transactions, minimising the risk of involvement in cash-related discrepancies," Suri added.
"Taxpayers should be aware that if their annual rent payments to the landlord surpass Rs 1 lakh, they must provide the landlord's PAN (Permanent Account Number) details in their tax return," Amit Gupta, MD, SAG Infotech said.  "This information is crucial for compliance purposes and enables tax authorities to monitor high-value transactions and verify the accuracy of tax filings," Gupta added.
Furthermore, maintaining detailed records of utility bill payments made during the tenancy period is essential, say experts.
In cases where the homeowner does not possess a PAN, obtaining a PAN declaration from them is of the utmost importance, as highlighted by experts.

The Income Tax Department issues notices for various reasons, citing different provisions, such as sections 143(1), 142(1), 139(1), 143(2), u/s 156, Section 245, and Section 148. Taxpayers may receive such notices for late or inaccurate filing of returns, erroneous refund claims, and other related discrepancies.