Can I pay rent to my parents to save tax?

Housing Rent Allowance, or HRA, is a portion of most salaried individuals’ pay. If you fulfil all of the conditions, the HRA you get is not entirely taxable and could be subtracted from your taxable income. To be eligible for HRA, you must live in rental housing and pay monthly rent. So, Can I pay rent to my parents to save tax?

Because since you live with your parents does not imply you could not claim HRA or that you should remain for gratis. You have the legal right to pay rent to your parents, brother, and other relatives as long as they own the residence. However, in order to avoid any legal hiccups, you must have a documented rental agreement, rent receipts, and have paid monthly rent to your parents. Even while paying rent to your parents and claiming HRA may look appealing, there are a few things to consider before claiming HRA when living with your parents.

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HRA-related measures in the Income Tax Act

According to Income Tax rules, if a person is of the legal age, i.e., 18 years or older, and is not financially reliant on his parents, he is regarded as a distinct taxpayer in the legal sense. The income computation differs from one income to the next, and hence the amount of HRA changes as well.

Requirements to qualify for HRA Tax Exemption

  • The residence should be registered in the parent’s name(s)
    The paid individual is to be depicted as a renter in his or her parents’ home. Because the rent needs to be paid to the house’s owner, the parents must own it. The residence might be registered in the name of one or both parents.
  • Rent should be paid immediately into a bank account or by check in the name of the parent(s)
    To claim the HRA exemption in this manner, the salaried must provide convincing verification of real rent paid to the parent(s). In such a circumstance, bank transfers or money transferred by check play a significant role.
  • You must engage in a rental agreement with your parent(s)
    To obtain HRA while living in his or her parents’ home, the salaried individual must engage in a rent agreement with his or her parent(s), who owns the home.
  • The rental revenue would be included in your parents’ overall income
    The rent paid to the parents is taxed under the heading “revenue from dwelling property.” They could reduce their own tax liabilities and even gain a 30% standard deduction from their rental revenue.
    If the parents have a lower tax band than the salaried worker seeking the HRA exemption, the family as a whole can save tax. They will also benefit from a larger minimum income exemption level if they are above the age of 60. (Rs. 3 lacs for those who are aged above 60 years old and Rs. 5 lacs for those who are aged above 80 years old). If they have no taxable income, you will be able to save a large amount of tax as a family.

Tax saving by Renting a House

The value of HRA that could be sought as exclusion is limited to the least of the following:

  • Actual HRA received
  • 50% of (Basic Salary + Dearness Allowance) for metro cities or 40% of (Basic Salary + Dearness Allowance) for non-metro cities
  • Payable rent (-) 10% of gross pay

Documentation needed to apply for House Rent Allowance

  • If the rent exceeds $3,000 per month, a rent receipt will be issued.
  • If the rent exceeds one lakh rupees per annum, the landlord’s PAN is required.

Doing Things Lawfully

It is critical that you do everything lawfully and in accordance with all rules and regulations. The income tax department examines 3% of all returns filed each year. If there is a discrepancy, the appropriate officials have the authority to require proof under section 143(3) of the Income Tax Act. If it is discovered that you underreported your income in order to reduce your tax burden, you may face a fine of up to 200 per cent of the tax owed on the misreported income. Because of the advent of 12BB, a declaration of HRA has been standardised for organisations, your employer is also liable for misreporting of your income.

While the income tax administration has measures at its disposal to combat revenue false reporting, you are entitled to demand HRA by paying rent to your parents. It is entirely legal, and you will suffer no consequences.

Final Words

Only salaried persons are eligible for HRA exemption. HRA cannot be claimed if the residence is in the name of the spouse since the husband and wife live together under the Income Tax Act. HRA is not permitted under the New Tax Regime. If you are living in a distant city owing to a job posting, you can claim both HRA and a house loan deduction of 1.5 lakh against principle repayment and 2 lakh against interest paid. Even if your payment does not include HRA, you can claim an HRA deduction under Section 80GG. This section applies to self-employed persons and those who do not get HRA as part of their wages.

CategoryIncome Tax

CA Vimal Kumar Sharma has expertise is in the field of Accounting, Budgeting, Management Reporting, Statutory Reporting, Regulatory Compliance, Working Capital Management, Taxation, Statutory and Tax Audit and posses experience of almost 5 years.

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