If you are presenting fake rent receipts to save your income tax, this practice can be harmful for you as the Income Tax Department (IT-D) is cracking down on taxpayers who are claiming House Rent Allowance (HRA) by submitting fake rent receipts. The department has been using data analytics and artificial intelligence to identify such cases and is sending notices to the defaulters.

Why do people resort to fake rent receipts?

The main reason why people resort to fake rent receipts is to save tax. HRA is a tax-free allowance, so by claiming a higher HRA, taxpayers can reduce their taxable income.

For instance, if a taxpayer claims an HRA of Rs 2.40 lakh per annum and their taxable income is Rs 10 lakh per annum, their taxable income will be reduced to Rs 7.60 lakh per annum. This will result in a tax saving of Rs 1.20 lakh per year.

How does the IT-D identify fake rent receipts?

The IT-D uses various methods to identify fake rent receipts. These methods include:

Data analytics: The income tax department uses data analytics to identify taxpayers who are claiming HRA from multiple employers.

Artificial intelligence: IT-D uses artificial intelligence to identify patterns of fake rent receipts.

Verification of rent receipts: IT-D may verify rent receipts with the landlord.

In this process, the department matches the AIS Form and Form-26AS with Form-16. After that, they can verify all transactions related to your PAN card. If anything is irregular or looks like a scam, you can easily point it out.

Paying via cash is good to consider; does it help?

The cash mode transaction is considered to hide records if you use this mode to pay rent to save tax.

For example, assume you have responded to the Income Tax department's letter by stating that the disparity between the rent receipt and the landlord's PAN transaction is due to the fact that you paid the rent or a portion of it in cash.

In such cases, the I-T department can also send a notice to the landlord requesting a response, and their tax burden may increase if they disclose the truth. You may also face charges of fraud.

What punishment may one face for this?

Under Section 270A of the Income Tax Act of 1961, the I-T department or assessing officer has the authority to levy a 50 per cent penalty if the assessee (a person who pays tax) underreports his or her income. As a penalty for filing fake rent receipts, the income tax department may request that you pay up to 200 per cent of your current tax due.