How to Claim HRA Exemption for Rent to Parents without Inviting Income Tax Depar

Posted by kiran singh on October 4th, 2018

Every salaried person once a year has to submit investment and expenses proof to get an exemption from taxable income. HRA (House Rent Allowance) is a benefit paid by the employer to his/her employee in India. Under Section 10 (13A) of the Income Tax Act, employees are eligible to claim HRA allowance as a tax deduction if they are paying for living in a rental accommodation.  People on salary who live on rent can claim their monthly rent expense as an exemption and get a tax benefit.

HRA or house rent allowance is the most common allowance received by the salaried employee. Those who are living on rented accommodation are allowed to claim HRA to save tax. Even if you are living with your parents then too you can claim HRA exemption. However, it needs to do be done in an organised way so you don’t invite unnecessary wrath from the tax department. There have been cases in the past where HRA exemption for giving rent to the parents have been rejected by the tax department as proper procedure was not followed. This article will help you remember the important points before putting HRA as your tax exemption while filing Income Tax during the end of the financial year.

Important points to note when claiming HRA for paying rent to parents

Ownership of the property

One of the common mistakes that many people make is that they try to claim rent on the property that is co-owned by them. You cannot claim a HRA allowance if you are living in a property in which you are the Owner. The Owner should be mother or father or both jointly.

Proof of transaction of rent paid

You need to pay the rent monthly in their bank account so that you have proper proof of transaction on enquiry from the tax department. The best way to do is have a direct debit instruction in place to get the rent money transferred to your parent’s account on the fixed date of every month. This way you will be able to support your House Renting Allowance claim properly.

Proper annual rent agreement in place

Due to improper claiming and misuse of HRA allowance in the past, the tax department has become stringent on the checks of HRA claim allowance. They have instructed the employers to ensure that proper rent agreement copy is submitted. You can make a simple agreement copy with your parents and get it notarised for authentication.

Submit rent receipts

You need to have proper rent receipts in place. You will need monthly rent receipts which need to be mention details of the rent and have a revenue stamp on it along with the signature of your house owner. The rent receipts need to be submitted to the HR department in case the Tax Officer asks them for verification.

Your parents will need to file tax on the rent income

The rent paid by you to your parents is not exempt from tax. Your parents will need to include this under income from house property when declaring their income during filling tax returns. 

Overall saving on tax as a family

Submitting the proper rent receipts and having a record of rent paid helps you claim the tax deduction on your taxable income under HRA exemption.  On the rent income, your parents can claim a deduction of 30%. If your parents fall under the lower tax bracket, they can save entire money on tax exemption. If your parents are the above the age of 60 years, then INR 3 lakhs is the income exemption limit, if your parents are above the age of 80 years then they will get income exemption limit benefit of INR 5 lakhs. This way the entire family will be able to make a significant amount of saving on tax.

Example

Neeraj who is 26-year-old male lives in Mulund, Mumbai with his parents. He works for a company in Andheri and commutes daily to his office. Neeraj was asked by his employer to submit tax saving declarations for the financial year 2017-18. Neeraj who lives with his parents is not sure if he can claim HRA as he is living in a house which is owned by his father.

Detail of salary earned by Neeraj.

Let’s see how much HRA will be exempted if Neeraj decides to pay the rent to his father. You can do the calculation by using any HRA calculator online

However, rent paid to Neeraj’s father will have to be included in his father’s total income.

Let’s take Case 1, where Neeraj decides to pay rent to his father of INR 12,000 per month. His father’s rental income is INR 1, 44,000 for the whole financial year. Besides this income, his father has interest income of INR 3, 00,000. His father is 62 years old.

Let’s find out taxable income of Neeraj’s father, before receiving rent and after receiving rent from Neeraj.

Neeraj’s father’s Income tax calculation illustration including and excluding rental income.

Total amount of tax saved as a family = INR 24,617 minus INR 5,325 = INR 19,292