House rent allowance

Introduction
The House Rent Allowance (HRA) is a ubiquitous component of Indian salary structures and a frequent battleground in tax assessments, employment disputes and compliance audits. For practitioners advising salaried clients, employers, or litigating before tax authorities, mastery of HRA’s statutory contours, evidentiary thresholds and litigation patterns is essential. This article distils the legal framework, demonstrates how HRA issues arise in practice, highlights judicial trends, and sets out pragmatic litigation and advisory strategies.

Core Legal Framework
– Statute: Income-tax Act, 1961
– Section 10(13A): Grants exemption in respect of HRA received by an employee. The exemption is available to the extent specified in the rules (i.e., subject to conditions and limits).
– Section 80GG: Provides deduction for rent paid where the taxpayer is not in receipt of HRA (applies to persons not receiving HRA from an employer, subject to conditions and a declaration in Form 10BA).
– Rules and Forms (Income-tax Rules, 1962 / CBDT forms and guidance)
– Calculation principle: The exempt amount under Section 10(13A) is the least of:
1) Actual HRA received;
2) Rent paid in excess of 10% of salary (salary for this purpose generally means basic salary + dearness allowance to the extent forming part of retirement benefits + commission based on fixed percentage of turnover); or
3) 50% of salary (in specified metropolitan cities — Mumbai, Delhi, Kolkata, Chennai) or 40% of salary (in non-metropolitan cities).
– Form 12BB: Employee furnishes proof and particulars of HRA and other exemptions/deductions to employer to enable correct tax computation/TDS.
– Form 10BA: Declaration required under Section 80GG where deduction for rent is claimed.
– Documentary requirements and landlord PAN: Employers commonly require rent receipts, lease agreements and, where aggregate rent paid to a landlord exceeds certain thresholds (administrative practice and CBDT guidance), landlord’s PAN for TDS and verification purposes.

Practical Application and Nuances
How HRA disputes arise and how they are argued in practice:
– Assessment context (AO scrutiny): The Assessing Officer (AO) may disallow HRA exemption where:
– No adequate proof of rent paid is produced (absence of rent receipts or bank evidence);
– Rent receipts are found to be fabricated or payments were not actually made to the stated landlord;
– The landlord does not report rental income (AO may treat the HRA as a disguise and seek to tax it).
Practical evidentiary expectations:
– Rent receipts signed by landlord with name, PAN (where required), address and stamp (if any).
– Bank evidence of payment: cheque leaf images, UTR/NEFT/RTGS credits in landlord’s account. Cash receipts are viewed skeptically by revenue authorities.
– Lease/rent agreement: shows landlord’s identity, rent amount, period, and signature.
– Correspondence and contemporaneous documents (e.g., emails, WhatsApp messages, utility bills of rented premises).
– For rent paid to relatives or related parties: additional scrutiny — AO will test genuineness. Payments to relatives must be at arm’s length and supported by clear proof of payment.
– Employer’s role and TDS:
– Employer must compute exempt HRA correctly; for that, it will normally require Form 12BB and documentary proof each year.
– If employee fails to provide proof, employer may include HRA in taxable salary and deduct TDS accordingly; employee can later claim refund in return filing but with burden of proof.
– Section 80GG claims:
– Available when employer does not provide HRA; taxpayers must furnish Form 10BA and meet conditions (no self-occupied house at place of employment or any other place; not receiving HRA).
– Calculation basis differs: deduction allowed is least of (a) Rs. 5,000 per month, (b) 25% of total income, (c) rent paid minus 10% of total income.
– Evidence: rent receipts, lease agreement, and declaration.
– HRA vs. actual accommodation:
– HRA can be claimed even where employee stays in employer-provided accommodation? No — if employer provides accommodation, HRA exemption doesn’t operate since actual accommodation is provided as perquisite.
– HRA claimed for accommodation occupied by employee’s dependents or at a different place from workplace: permissible so long as rent is actually paid and other conditions are satisfied — but see evidentiary scrutiny below.
– Forensic issues commonly litigated:
– Genuineness of rent receipts (fabrication vs. actual payments).
– Whether the “salary” base for calculation includes specific allowances (e.g., treatment of dearness allowance).
– Rent paid to close relatives/companies controlled by employee — is the arrangement genuine or a device to claim exemption?
– Disallowance where landlord fails to return rent as income — AO may initiate proceedings under sections for concealment.

Concrete examples (typical factual matrices and litigating points):
1. Employee claims HRA of Rs. 2 lakh; employer has deducted TDS assuming exemption. AO issues notice seeking proof. Employee produces rent receipts signed in cash; bank statements show cash withdrawals but no credit to landlord. Litigation point: Employee must produce direct evidence of payment to landlord (bank credits, landlord cheque deposit copy, landlord’s bank statement). Mere cash receipts are weak; AO may treat HRA as taxable.
2. Employer-company pays HRA while employee pays rent to a company where employee holds shares. AO alleges sham. Litigation point: Establish genuineness — rent agreement, independent market rent evidence, bank transfers to company account, company returns showing rental receipt and tax paid. If company income tax returns show consistent rental income and it is not a mere pass-through, chances of success increase.
3. Employee occupying self-owned home but receiving HRA from employer. Litigation point: HRA is received and taxable; exemption will be nil unless rent is actually paid to someone else.

Landmark Judgments
The jurisprudence around HRA is extensive and predominantly developed through High Court and ITAT decisions which examine evidentiary standards and the test of genuineness. A few high-level judicial principles repeatedly applied by courts:
– Exemption under Section 10(13A) is factual — compliance with documentary conditions and contemporaneous proof of actual rent payment is crucial.
– The AO’s power to probe is wide; where material contradictions or absence of bank evidence exists, courts have upheld disallowance of HRA.
– Transactions with relatives and related entities attract closer scrutiny; employer and employee must demonstrate commercial reality.

(Practitioners: Identify and rely on recent High Court and ITAT rulings from your jurisdiction addressing HRA genuineness, bank transfer proof, and landlord PAN issues. Case law is fact-sensitive; for citation in pleadings, select authorities whose facts closely match your client’s.)

Strategic Considerations for Practitioners
Advising employees and employers
– Pre-emptive compliance (best practice):
– Employers: insist on Form 12BB and allow time for employees to submit prescribed proof each year. Maintain a checklist (rent receipts, bank transfer proof, lease agreement, landlord PAN when needed).
– Employees: preserve contemporaneous proof — bank transfers/UTR evidencing payment to landlord, rent agreement, and correspondence.
– Structuring advice:
– If employee does not receive HRA but pays rent, evaluate Section 80GG — ensure Form 10BA and conditions satisfied; calculate deductible amount carefully.
– Where an employee is paying rent to a relative or entity controlled by him/her, document commercial rationale, market rent comparables, and ensure landlord reports rental income.
– In assessment proceedings:
– Burden and strategic evidence: The employee bears burden of proof to show rent paid. Produce strongest direct evidence (bank credits, landlord’s acceptance in bank account, landlord’s IT return). Obtain landlord’s confirmation or affidavit if required, and, if the landlord is non-cooperative, consider seeking relief under the Income-tax Act’s procedures/ITAT remedies.
– Credibility: reconcile statements — consistent rent figures across years, matching of deposited amounts in landlord’s bank account to receipts, corroborative evidence (e.g., utility bills in rented premises) will build credibility.
– Litigation tactics:
– If AO disallows exemption, frame appeal on narrow factual lines — challenge sole reliance on cash receipts or minor documentary gaps where substantial corroboration exists.
– Where AO alleges sham arrangement with related party, produce market rent evidence (comparables), tenancy agreement, and landlord’s tax filings showing rental income.
– Use interlocutory steps: secure stay of demand by filing stay applications with Commissioner (Appeals) or early relief before assessment completes, on showing strong prima facie case and minimal prejudice to revenue.
– Pitfalls to avoid:
– Over-reliance on informal cash receipts; avoid paying rent in cash if expecting to claim tax benefits.
– Failing to obtain landlord PAN or maintain documentation when rent crosses administrative thresholds.
– Treating HRA as a “paper-only” arrangement with relatives or family companies — courts and tribunals routinely pierce such arrangements.

Conclusion
HRA is more than a payroll entry: it is a tax-sensitive allowance that invites close administrative and judicial scrutiny. Practitioners must treat HRA claims transactionally — document rent payments contemporaneously, anticipate AO’s inquiries, and when litigating, present a tightly corroborated evidentiary trail. Key statutory anchors are Section 10(13A) (exemption for salaried employees) and Section 80GG (deduction for those not receiving HRA). Successful advocacy blends statutory arithmetic (the least-of formula), rigorous documentary proof (bank transfers, lease agreements, landlord’s tax compliance) and tailored case-law authorities that mirror the client’s facts.