Rent paid in cash is not illegal, but this one mistake can cost salaried tenants their HRA benefit — details here

There are many cases in India where landlords insist on receiving rent in cash, whether for a rented flat, a shared accommodation or a paying guest (PG) facility. This is where things can become slightly complicated for salaried taxpayers who claim House Rent Allowance (HRA) under the old tax regime.

Paying rent in cash does not automatically make a taxpayer ineligible for HRA, and the benefit cannot be denied solely because the payment was made in cash. However, if the tenant is unable to maintain the required supporting documents, the HRA claim may face scrutiny and could even be rejected.

“The general idea is that cash rent payments do not negate HRA claims, but poor documentation will result in a claim that is difficult to defend if it is challenged by the tax authorities,” according to Siddharth Maurya, Managing Director at Vibhavangal Anukulkara Pvt Ltd.

How much of your HRA is exempt from tax?

If you are a salaried individual, you can claim HRA to meet your rented accommodation-related expenses and reduce your tax liability. The entire HRA received is not always fully exempt from tax, according to a Cleartax report.

The least of the following three will be taken to exempt from tax:

• HRA received from your employer
• Actual rent paid minus 10% of salary
• 50% of basic salary for those living in metro cities and 40% of basic salary for those living in non-metro cities

The remaining amount from your HRA is added back to your taxable salary.

However, if you don’t live in a rented accommodation but still receive house rent allowance from your company, the amount will be fully taxable.

How much cash payment is allowed?

Though rent payments are not disallowed, there are tax implications for the payer if sufficient evidence is not maintained for the payment.

For a business assessee, cash rent above ₹10,000 in a day is disallowed as an expense under Section 40A(3), said Chandni Anandan, tax expert at Cleartax, adding that rent receipts for cash above ₹5,000 should carry a revenue stamp, which is requirement under Stamp Act and not an income tax one.

Another practical ceiling that the expert stated is that a landlord cannot accept ₹2 lakh or more in cash from one person in a day under Section 269ST of the Income-tax Act, though that restriction and its penalty apply to the landlord receiving the money, not to the tenant.

Why cash payments may be problematic?

A tenant is not obliged to pay rent for a resident through a bank account or digital modes only, but cash payments may be difficult to prove as there is no payment trail that occurs through a bank, Maurya said.

He also explained that tenants paying higher value rent must also be concerned with TDS (tax deducted at source). If the monthly rent exceeds ₹50,000, there are TDS provisions that must be complied with irrespective of the payment being made in cash or through a bank.

“Therefore, while paying cash rent may be allowed, the limit prescribed must be complied with. A bank transfer, UPI, or a cheque is more advisable,” he added.

How to claim HRA if rent was paid in cash?

HRA exemption can still be claimed despite paying rent in cash. Here’s what experts advise tenants to do to successfully claim HRA:

• Obtain a rent receipt each time cash rent is paid, and make sure they include the name of the landlord, address of the property, the month for which rent is paid, and the amount and mode of payment.
• Have a rent agreement in place and also collect signed and dated rent receipts for each month.
• Keep documentation showing the cash withdrawals, if available, but a withdrawal request by itself does not prove that the rent was paid.
• If the yearly rent is more than ₹1 lakh, the tenant is usually required to give the landlord’s PAN to claim HRA.

“The general idea is that cash rent payments do not negate HRA claims, but poor documentation will result in a claim that is difficult to defend if it is challenged by the tax authorities,” Maurya said.

What happens if the landlord doesn’t declare rental income in their ITR

Practically, a genuine HRA claim is not restricted merely because the landlord fails to report the rental income, Chandni said.

“The obligation to declare that income rests with the landlord, and any consequence, including a notice, falls on them, not the tenant,” she added.

She noted that the tenant’s claim can, however, become the trail that surfaces the landlord’s non-disclosure. Hence, to keep your claim secure, retain the rent agreement, rent receipts, proof of payment, and Form 16 reflecting the HRA.