House rent allowance: Tax exemption can be claimed on rent paid to parents

Prepare an agreement, pay rent into their bank accounts, and ensure they pay tax on it

Salaried individuals who opt for the old tax regime, live in rented houses, and have the house rent allowance (HRA) component in their salary are eligible for HRA tax exemption under Section 10 (13A) of the Income-Tax (I-T) Act, 1961 provided they are able to meet certain conditions. This exemption is not available under the new tax regime from assessment year 2021-22 onwards.

Let us examine a few grey areas where it is not immediately apparent if a taxpayer is eligible for this exemption.

Living on rent while owning a home

Normally, if you pay rent for accommodation, you get tax exemption on HRA. Archit Gupta, chief executive officer (CEO), Clear. in, says, “The caveat is that the house you live in and the house you own should be in different cities.”

Sometimes, however, people have a property in the same city and yet live in rented accommodation. In such a situation, you must have a good reason for not living in your own house. One could be that your house is situated far away from your workplace. Gupta adds, “You may need to provide these explanations to the I-T authorities in case of a scrutiny.”

Your house must be let out if you claim HRA exemption. You can’t claim this exemption if your house is self-occupied or vacant.

HRA and home loan deduction

Many taxpayers wonder if they can simultaneously claim HRA exemption and also a deduction on the interest repaid on a home loan.

Maneet Pal Singh, partner, I.P. Pasricha & Co, says, “You may claim HRA as it has no bearing on your home loan interest deduction. Both can be claimed.”

Don’t get HRA but live on rent

Many people pay rent to live in a residential accommodation but their salary doesn’t have an HRA component. Singh says, “In such a situation, you can claim deduction under Section 80GG, provided you fulfil a few conditions.”

One, you must be salaried or self-employed. Two, you shouldn’t get HRA at any time during the year for which you claim Section 80GG deduction.

Singh says, “The third condition is that you, your spouse, your minor child, or the Hindu Undivided Family (HUF) of which you are a member shouldn’t own a residential accommodation at the place where you reside currently, work, or carry on business or profession.”

In addition, you can’t claim this deduction if you own a residential property in any other city, which is self-occupied or vacant. You can claim this deduction only if the property is let-out. If it is lying vacant, it will be deemed to be let out for you to be able to claim this deduction.

Submit landlord’s PAN

If you have rented a house and pay a rent of over ~1 lakh annually, you must provide the landlord’s permanent account number (PAN). If you fail to do so, you could lose out on the HRA exemption. Singh says, “Landlords without a PAN must sign a self-declaration stating they don’t have this document.”

Rent paid to family members

It is legally acceptable to pay rent to your parents and claim HRA benefit. You must sign a rent agreement with them and deposit the monthly rent in their account via bank transfer or cheque. Keep your rental agreement and rent receipts handy for submission of proof.

Sumit Sabharwal, CEO, TeamLease HRtech, says, “Your parents will have to pay tax on the rent received. They can claim a 30 per cent standard deduction on this income. Also, the property must be owned by your parents.” Your spouse, minor child, or you can’t be its co-owner.

Last year the Income Tax Appellate Tribunal, Delhi ruled that HRA exemption can’t be denied on the ground that an assessee paid rent to his spouse.

Suresh Surana, founder, RSM India, warns, “Payment of rent to family members, especially spouses, has always been a contentious issue since the relationship between the payer and payee is of a non-commercial nature.” Such a transaction could be subjected to scrutiny by the tax authorities.

HRA exemption on rent paid to family members

HRA exemption is deducted from total income before determining gross taxable income

If you don’t pay any rent or live in your own house, the HRA you receive from your employer will be fully taxable
 

Taxpayer paying rent to family members may claim HRA exemption for the least of the following amounts:

Actual amount of HRA received; 50 % of salary for metro cities of Mumbai, Kolkata, Delhi or Chennai, or 40% of salary in any other case
 

Rent paid in excess of 10% of salary