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How to Claim HRA Exemption for Rent Paid to Parents without Inviting Department’s Wrath?

Jagrity Sharma Jagrity Sharma 18 September 2019

Here’s a quick read explaining how you can claim HRA exemption for the rent paid to parents.

HRA Exemption

Congratulations! You have landed your dream job with a lucrative pay package and are eagerly wait for the salary day. But when you finally get your salary, you learn that the tax deductions are eating into your take-home salary figure. This is when you realise the importance of tax exemptions and start planning for them.

One of the easiest, yet often misunderstood exemptions, is the HRA or House Rent Allowance. If you work in the same city where your parents live, then you may choose to live with them. In that case, it makes sense that you pay rent to your parents and claim the exemption on the same. However, there are a few things to keep in mind while making this claim. Want to know what they are? Read on!

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. The document needs to be crystal clear and without any ambiguity.

Ownership of the Property

Since the rent agreement establishes you as the tenant and your parents as the landlord, the property must be owned by your parents. It can be co-owned by both or by one of them. Whatever may be the case, it needs to be mentioned clearly in the rent agreement and in the property ownership documents.

Needless to say, you cannot claim an exemption for rent paid to yourself. If the property is co-owned by you and your parents, you will not be eligible for any exemptions. This is also one of the most common mistakes made while applying for HRA exemption.

Rent Receipts

How will the Income Tax department know that you actually made the payments? You need to submit rent receipts as proof. Also, to avoid any confusion or questions at a later stage, make sure that you make the payments via bank transfer or cheque instead of making cash payments. The idea is that there should be a clear paper trail for the payments made in addition to the rent receipts. The receipts should clearly mention the rent amount, duration, and additional payments, such as that towards utilities bills, if any.

Landlord's PAN Details

If your annual rent payment exceeds INR 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 INR 1 lakh annually.

Reside in the Specified Property

Many are tempted to misuse the provision for HRA exemption for rent paid to parents. However, keep in mind that the Assessing Officer can visit the premises to confirm whether you actually reside at the said address. If they find out that you were not truthful, you will not be eligible for the exemption and the full HRA amount will be taxable.

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.

Calculate HRA Exemption

To ensure that you are actually saving money by paying rent to your parents, you need to know how much of your HRA can be exempted. This amount is the minimum of the following three.

  • The actual amount you receive as HRA from your employer.

  • For metro residents, 50% of your salary and for non-metro residents, 40% of the salary.

  • The difference between the rent paid annually and 10% of your annual income.

Calculate these three values, and whichever is the lowest will be the amount that gets exempted. You will have to pay tax on the rest of the amount.

Claim HRA Exemption The Right Way!

HRA exemptions on rent paid to parents is a great way to reduce the amount of taxes you pay. With a little calculation and careful planning, you save on taxes as a family. The key is to do it the right way and be systematic and truthful about it. You should refrain from using this exemption irresponsibly.

Make sure that you have all the necessary documents in place while applying for the exemption. If you are unsure about the format for the rent agreement or the rent receipt, there are various resources online that can help you out with the proper format.

You just need to do the following - do some research, be meticulous about saving all the receipts, make the payments on time and do it via bank transfer or cheque. You can claim the exemption that is rightfully yours without any hassle.

Jagrity Sharma
Written by Jagrity Sharma
A bibliophile who hates alliterations, but loves cream, comics and content immensely! On another note, a content marketer who leverages the power of words to explain...almost anything!