House Rent Allowance (HRA) Claims Comes Under Tighter Scrutiny - Things To Note

Are you availing House Rent Allowance (HRA) exemption from your employer? 

Then, you must pay close attention to a recent verdict from Mumbai Income Tax Appellate Tribunal that calls for a tougher scrutiny of HRA claims submitted by employees for exemption purposes. The new guidelines issued by the tribunal confers greater power in the hands of the assessing officer to demand proof from the employee to verify whether the tenancy is genuine or not. 

HRA is a key component of salary for salaried individuals that can easily help them save nearly 60% of the allowance from taxes. Submitting rent receipts was considered enough to avail the exemption until now. But this is expected to change with more stringent rules in place that may require a tenant to present electricity bill, water bill, leave and license agreement, etc. to receive the benefit. Also, actual outflow of rent to the landlord via bank account transfer might become a necessity in coming days, particularly when the government is trying to drive the economy towards cashless economy. 

Understanding The Deeper Impact

The guidelines should sound an alarm to those tax payers who are submitting rent receipts in the name of their close relatives such as brother, sister, mother or father residing in the same city. Also, showing rental payments through cash instead of bank transfer can further lead to suspicion and must be avoided in all cases. Tenants who are currently residing in a rented house should arrange for sufficient proofs every year to keep away from income tax scrutiny. 

Things To Do To Avoid Rejection of HRA Claim

• First and foremost, all rental payments should be accounted through bank transfers only. 
• If you are residing in your relative’s house and claiming HRA then make sure to enter into a proper rent agreement. All exchange of emails or money in this regard should also be recorded. 
• Relative receiving rent from you should file his or her income taxes and should show it as receipt of rental income. Needless to say, assessing officers can easily cross-check this aspect to confirm the validity of a claim. 
• It is difficult to claim HRA for a rented house when you already own a house in the same city. However, if the owned house is situated outside the city then such claims are acceptable. 
• A point to remember that the rent of any property should not exceed the fair rental value of the similar property in the neighbourhood or locality as it may lead to rejection. 
• Married woman cannot claim rental payments to her father or mother while actually residing with her husband and in-laws. 
• Bank statements and other proofs of residence should bear address of the rented premises to further substantiate the claim.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

Visit www.facebook.com/Inverika to learn more.

Quick look At Historical Returns of Various Asset Classes

Based on the historical returns analysis, it is established that returns from different assets vary vastly even during a comparable time horizon. While we are aware that “past performance is no guarantee of future results”, but again historical returns do hold some relevance in driving investment decisions. 

Further, it is known that returns from assets matter the most to an investor based on his/her risk appetite and the time horizon, therefore it is imperative to at least have some idea on how various assets actually performed over different time horizons. 

Image Courtsey: By Realterm

In this piece, we try to recapitulate returns delivered by some of the key assets over a timeframe of one year, three years, five years and ten years to understand how they fared against the general expectations.

Asset Type	1-Yr	3-Yrs	5 -Yrs	10-Yrs
Nifty 50 Index	20.69	11.03	12.10	9.21
Equity	22.72	14.44	13.95	10.48
Debt (Consrvative)	12.69	11.61	10.07	9.25
Gold Fund	-0.66	-0.86	-0.82	10.85

*Source- www.valueresearchonline.com

What Those Numbers Say?

A quick look at the returns of various assets helps to derive some key takeaways from history. 

• Equity outperformed other asset classes over one year. However, the risk involved in such short-term bets should not be ignored at any point in time. 
• Both equity and debt managed to deliver returns that are generally expected out of them. 
• Debt lagged equities by a small margin over three and five year periods. The returns from this asset class seem appealing considering the fact that debt funds invests in less risky instruments and are relatively safer than equities. With risks factored in, equity remained a clear winner over others during the two time horizons. 
• Gold won over all the other three asset classes in long-term. However, its rally against equity was only marginal. The asset class delivered negative returns through one, three and five-year periods, which should help investors overweight in this asset class to reassess its ‘safe-haven’ status.

Final Word

Yet again, we would like to reiterate that returns from various assets are unpredictable, just like the way gold returns eclipsed those of the equity in the above compiled table. The opposite of this outcome is equally possible ten years down the line. 

In a nutshell, the table above serves as a strong basis to believe in ‘Diversification’, which has been underlined as an important element of financial planning time and again. Besides this, there is no one diversification strategy that suits all. So it's always better to seek appropriate advice when in doubt. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

Visit www.facebook.com/Inverika to learn more.