Tax Dept intensified scrutiny on Section 80G donations & HRA

Tax Dept intensified scrutiny on Section 80G donations & HRA exemptions

The Income Tax Department’s intensified scrutiny on Section 80G donations and HRA exemptions under Section 10(13A) highlights the need for taxpayers to be extra vigilant in ensuring compliance.

False House Rent Allowance (HRA) Claims (Section 10(13A)):

Employees claiming HRA deductions without actually renting a property. and Fake rent receipts issued by landlords who do not declare the rental income.

What are the key concerns related to the non-deduction of TDS on rent? 

If you pay rent exceeding ₹50,000 per month, you are required to deduct 5% TDS under Section 194IB (for individuals & HUFs not subject to audit). Similarly, businesses and firms must deduct 10% TDS under Section 194I if applicable.

Other Areas of Investigation & Fraudulent Claims Identified

• Fake Donations & Political Contributions: False claims under Section 80G (charitable donations) and 80GGB/80GGC (political party donations). And some taxpayers made bogus donations and received cash refunds from trusts. Form 10BE non-compliance flagged.
• Fabricated Education Loan Interest Deductions (Section 80E): Claiming tax benefits on non-existent education loans.
• Fake Tax-Free Investments (Section 80C & 80D): Investments in PPF, LIC, and ELSS mutual funds falsely claimed. and false health insurance premium claims under Section 80D.

Repercussions of Failing to Deduct TDS on Rent:

What are the potential consequences for taxpayers & employers?

• Tax Demand & Penalty: 100% to 300% penalty under Section 270A for misreporting or underreporting income. and also face Interest under Section 234B & 234C for unpaid tax dues.
• Employer Liability: Companies facilitating fraudulent claims under Section 192 (TDS on salary) will be penalized.
• Disallowance of 30% of Rent as Expense (Section 40(a)(ia)): Businesses failing to deduct TDS will lose the 30% deduction on rental expenses, increasing taxable income.
• Scrutiny & Notices: E-verification & inquiries on large donations or mismatched claims with Form 26AS, AIS, and TIS.
• Retrospective TDS Payment & Interest (Section 201(1A)): 1% per month on TDS not deducted. and 1.5% per month if deducted but not deposited on time.
• Deemed Assessee-in-Default (Section 201(1)): The taxpayer becomes liable to pay the tax due.
• Penalty (Section 271C): A penalty equal to the amount of TDS not deducted may be levied.
• Prosecution Risk (Section 276B): Imprisonment of 3 months to 7 years for willful failure to deduct/deposit TDS. Severe fraud cases may lead to prosecution under Section 276C, with imprisonment up to 7 years.

What next steps should taxpayers take?

• Verify that all deductions & exemptions claimed are backed by genuine receipts & documents.
• Verify whether TDS was deducted & deposited correctly.
• Ensure that Form 10BE is available for donation claims. and also Ensure donations under 80G are backed by valid receipts & Form 10BE (for CSR donations).
• File TDS returns (Form 26QC for 194IB, Form 26Q for 194I) to avoid penalties.
• Reassess past ITRs & rectify errors through an updated return (ITR-U) before March 31, 2025, to avoid severe penalties.
• Check for compliance notices in your e-filing account.
• Employers should educate employees on legitimate deductions & compliance.