Understanding Cash Rent Payments and HRA Deductions in India

The income tax laws in India offer several benefits to salaried individuals, especially when it comes to rent payments. One of the most widely used benefits is House Rent Allowance (HRA), which allows employees to claim tax exemptions under Section 10(13A) of the Income Tax Act.

But here's the catch: to claim this exemption, you need to follow certain rules and have the right documents in place, especially if you're paying rent in cash.

In this blog, we will cover:

• How much rent can be paid in cash?

• Eligibility Criteria for Claiming HRA Deduction

• Documents required for HRA deduction

• How to Calculate the HRA Exemption?

How Much Rent Can Be Paid in Cash in India?

Knowing how much rent can be paid in cash is crucial for ensuring a smooth HRA claim. 

While there is no law that outright prohibits paying rent in cash, Section 269ST of the Income Tax Act of 1961 imposes certain restrictions on these payments. Specifically, it prohibits receiving cash payments of ₹2 lakh or more in the following situations:

• In a single transaction: This means you cannot pay ₹2 lakh or more at once.

• From a single person: If you receive multiple payments from the same person, their total cash payments must not exceed ₹2 lakh.

• For transactions related to a single event or occasion: This applies if multiple payments are made for the same purpose (like rent) within a short period.

If these limits are exceeded, the recipient (typically the landlord) may face a penalty equal to the amount received in cash. This rule promotes transparency and discourages tax evasion by ensuring rental income is properly reported.

So, how does all this affect HRA deduction?

Cash rent payments can significantly impact your HRA claim. While paying rent in cash is legal, it can lead to complications if not handled properly. Here's why:

• Unreported income: Sometimes, landlords may not report cash rent as income. This can cause problems when you try to claim HRA, as your declared rent payments may not match the landlord's reported income.

• Documentation issues: If landlords don't issue proper rent receipts for cash payments, it becomes difficult to prove your rent expenses during the HRA claim process.

• Legal limits: Lastly, both parties must adhere to the limits set by Section 269ST.

You can successfully claim your HRA only if you follow these limits and have all the required documents in place.

Eligibility Criteria for Claiming HRA Deduction

To claim a House Rent Allowance (HRA) deduction as a salaried individual in India, you must meet the following criteria:

• The individual must be a salaried employee receiving HRA as part of their salary package.

• The individual should be living in rented accommodation, and the rent paid must be for the house they are living in.

• Rent should be paid to a landlord, and if the annual rent exceeds ₹1 lakh, the individual must provide the landlord’s PAN.

• The individual must provide valid proof of rent payments, such as rent receipts or a rental agreement.

• The landlord should file their Income Tax Return (ITR) on rental income. For every HRA claim, there must be a corresponding income offered for tax by the landlord.

What are the Required Documents for HRA Deduction?

1. Rent Receipts

Rent receipts should cover the entire period for which HRA is being claimed. They must include the following details:

• Landlord’s name

• Date

• PAN card details of the landlord

• Address of the rented property

• Amount of rent paid

• TDS deducted (if applicable)

• Mode of payment (cash, bank transfer, etc.)

• Landlord’s signature

• The rent period being claimed

If the monthly rent payment in cash exceeds ₹5,000, a revenue stamp must be affixed to the receipt.

Note: The same rent receipt can be used for up to 3 months, so you will need at least four receipts for the entire year.

2. Rent Agreement

A rent agreement is an important document that employers may ask for to provide HRA deduction benefits when calculating TDS on salary. While the Income Tax Act 1961 does not specify a mandatory format for a rent agreement, including certain details can greatly assist in claiming HRA and complying with tax laws.

Here are the key elements that should be included in the rent agreement:

• Both the tenant's and the landlord's full names and addresses should be clearly mentioned.

• It is recommended that the PAN and Aadhaar card numbers of both the tenant and the landlord should be added.

• The agreement should clearly state the monthly rent amount, the duration of the tenancy, and the mode of payment (cash, bank transfer, etc.).

• For legal validity, the agreement should be signed by two witnesses, the tenant and the landlord and it should be notarised.

Remember, a comprehensive and clear rent agreement not only supports your HRA claim but also helps avoid potential scrutiny from tax authorities. 

3. Landlord’s PAN Card Number (if required):

If the annual rent exceeds ₹1 lakh, the tenant must submit the landlord’s PAN card number to their employer. This is a key requirement for claiming HRA on higher rent amounts.

4. Proof of Rent Payment

Proof of payments, such as bank statements, payment receipts, or any form of transaction record (for online transfers), is essential, especially if rent is paid through a mix of cash and digital methods. This will help in case any issues arise during tax filing.

Having these documents ready will make it easier to support your HRA claim when you file your Income Tax Return (ITR) or submit it to your employer.

How to Calculate the HRA Exemption?

The HRA exemption will be the least of the following three amounts:

• Actual HRA received from your employer.

• 50% of [basic salary + DA] for metro cities (Delhi, Kolkata, Mumbai, or Chennai) or 40% of [basic salary + DA] for non-metro cities.

• Rent paid minus 10% of [basic salary + DA].

Conclusion

While paying rent in cash is permissible, adhering to the guidelines set by the Income Tax Act is crucial. By following these rules and keeping the right documentation, you can make the most of your HRA benefits without running into compliance issues.

Frequently Asked Questions: FAQs

Can I show rent paid in cash?

Yes, tenants and landlords can handle rental payments in cash as long as the transaction complies with the provisions of Section 269ST of the Income Tax Act, 1961. 

How much rent can be claimed without PAN?

You can claim rent for HRA purposes without providing the landlord's PAN if your annual rent is less than ₹1 lakh. For rent payments of ₹1 lakh or more in a financial year, your employer will ask for your landlord's PAN card number. 

Can I pay rent to my parents in cash and claim HRA?

Yes, you can pay rent to your parents in cash and claim HRA, but keep these points in mind:

• There should be a formal rent agreement between you and your parents, outlining the rent amount, tenancy terms, and rental period.

• You need to pay the rent regularly.

• Your parents must own the property.

• You should not be an owner or co-owner of this property.

• Your parents should declare this rental income on their tax return.