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September 13, 2020

Paying rent to your parents to claim HRA? Know what all documents you should prepare

by shivam jaiswal in Income Tax

Paying rent to your parents to claim HRA? Know what all documents you should prepare

Rent expense is the cost incurred by a business to utilize a property or location for an office, retail space, factory, or storage space. Rent expense is a type of fixed operating cost or an absorption cost for a business, as opposed to a variable expense.

Rental expenses are often subject to a one- or two-year contract between the lessor and lessee or a landlord and tenant, with options to renew. Salaried individuals, who live in rented houses, can claim the House Rent Allowance (HRA) to lower their taxes – partially or wholly under the Income Tax Act. The deduction available is the least of the following amounts:

  • Actual HRA received
  • 50% of [basic salary + DA] for those living in metro cities (40% for non-metros) or
  • Actual rent paid less 10% of basic salary + DA

The eligibility criteria to avail HRA exemption is

  • The person should be a salaried employee. Self-employed professionals cannot avail the deduction. 
  • He has the HRA component in his salary structure.
  • He should be living in rented accommodation. The rented premises must not be owned by the person claiming the tax exemption. The cost for maintenance works, such as structural repairs, whitewashing, and painting shall be borne by both the tenant and the landlord. While the major chunk of the expenses is usually borne by the landlord, the agreement has to state which party will bear the expenses for specific items. Tenants are generally responsible for their own electrical bills or water charges so long as their lease agreement does not dictate otherwise.
  • Rent has to be actually paid – If you are staying on rent, you should actually pay the rent amount to the landlord and there should be adequate (proof of payment proof of payment like bank receipt (cash are not considered in scrutiny). Mere declaration and submission of rent receipts without transfer of money can’t be taken as sufficient proof to claim HRA benefits.

Let us refer the following example:-

Consider the scenario of an individual, Mr X

He earns a basic monthly salary of Rs. 30,000, Medical allowance of Rs 2,500, other allowances of Rs 2,500 and HRA of Rs 15,000. He pays Rs 12,000 as rent for accommodation in Mumbai.

  • Actual HRA received = 15000*12 = Rs 180,000
  • Actual rent paid annually over 10% of annual salary = 12000*12=144000-10% of [(30,000 x 12)] = Rs 1,08,000
  • 50% of salary (metro city) = [(30,000 x 12) x 50%)] = Rs 180,000

Rs 1,08,000 is the least value obtained out of the three methods. Thus, the amount of HRA exempt will be Rs 1,08,000.

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Can I pay rent to my parents and claim HRA?

Yes, one can claim the HRA exemption by paying rent to their parents. It is always advisable to have a rent agreement. One would require rent receipts in order to claim HRA exemption. Also, your parents need to show rental income from you in their income tax return. Therefore, those who live with their parents can pay rent to their parents and save tax on HRA.

What are the necessary documents required to claim HRA?

To claim HRA, one has to submit important documents like:-

  • Rent receipts –
  • Rent Agreement – When you pay rent to your parents for living in their home, they become your landlord. The Income Tax department requires proof for this. A rent agreement between you and your parents is this proof. The agreement should be signed by both you and your parents. It should contain other details, such as the premises that are rented by you, whether the payment is made monthly or yearly, and whether you make payments towards utilities as well. 
  • PAN No of the landlord – If your annual rent payment exceeds Rs 1 lakh, you are required to provide the PAN card details of your landlord, in this case, your parents, to your employer. If your parents do not have a PAN card, they need to give a declaration stating the same. They should also fill out Form 60, and you need to submit the declaration along with this form to your employer. Without doing either of these, you cannot claim tax exemption on your HRA if the rent paid is above Rs 1 lakh annually.
  • Name of the landlord and tenant
  • Address of the rented accommodation
  • Duration of stay
  • A revenue stamp
  • Signature of the landlord on the revenue stamp

Parents Must Pay Tax on Rental Income

The rent paid by you becomes a source of income for your parents. They must declare this and pay taxes on the same. It should be included under ‘Income from House Property.’ They can claim an exemption on the property taxes paid by them. They can also deduct 30% of the rental income as maintenance expense. Paying rent to your parents and claiming HRA exemption is only beneficial under certain scenarios.

  • If your parents do not have any other source of income apart from the rent, then you save money as a family. The rental income can be settled as an amount that is below the taxable income. You get HRA exemption, and your parents do not have to pay taxes.
  • Even if your parents have other income sources, if their income puts them at a lower tax bracket compared to yours, it is still a profitable arrangement. For example, if you are in the 30% tax bracket, but your parents are in the 10% bracket, you save 20% of the tax on the rent.

Why should I need to submit rent receipts to the HR Department?

  • As per the Income Tax rule of India, every person who pays salary is required to deduct tax at source (TDS), deposit with the government and then pay the remaining amount to the employee.
  • During this process, if any employee makes a tax saving investment then the person liable for deducting tax has to consider and give the benefit of that investment and then deduct the tax on the net amount.
  • Usually, it has been seen that people present fake rent receipts, even when they are not living in rented accommodation. So, to counter this, HR departments have begun asking for rent agreements for giving HRA benefits.
  • Normally, every employer has its own last date or deadline by which all investment proofs documents must be submitted.
  • Extra TDS will be deducted from the take-home salary if the employee misses the deadline. However, the employee can claim the extra TDS deduction directly from your income tax return.

Can I claim both home loan deduction and HRA?

Yes, If you are a homeowner and you are paying back your home loan, you can claim HRA if you live in a rented property. You are allowed to get both the benefits to reduce your taxable income.

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