Explained: How to claim HRA if you are living with your parents

There's no prohibition to claim such deduction while living with houses owned by family member. However, to claim such deduction of HRA, one should be mindful of the following

If you have opted for the old tax regime this financial year, and are currently living in your parents house, you can still claim house rent allowance and save on taxes without violating any laws.

HRA or house rent allowance is the most common allowance received by the salaried class. The HRA allows for deduction of the rent paid for a house from the taxable income of that employee. The deduction for such rent paid is limited to the lowest of the following three:

a. House Rent Allowance received.

b. 40% of Basic Salary (50% in case of Delhi, Chennai, Kolkata and Mumbai)

c. Rent paid less 10% of the basic salary

While people who are living in rented accommodation can claim this deduction easily,  the situation is tricky for those who are living with their parents or family. "In such situations, the house is usually owned by one of the family members, say the father, while the salary is earned by another family member like the son," said  Ankit Jain, Partner, Ved Jain & Associates. The question that often comes is whether the son can claim deduction of HRA for this house.

Since rent is paid to owners, the property must be owned by your parents. It may be owned by one or both of your parents. "So, you can deposit the money to any one of the parents in case of joint house ownership, or to the parent who is the legal owner of the house. Remember that you cannot be an owner or co-owner of this property since you cannot claim tax exemption on rent paid to yourself," explained ClearTax.

The rental income paid by you is to be reported under the head ‘income from house property’ in your income tax return.

However, parents  can claim property taxes paid by them and also claim a 30% standard deduction from this rental income.

Jatin Ghuliani, Senior Associate, SKV Law Offices decodes what conditions must be satisfied for employees to be eligible for HRA tax exemption while living with parents:

The house should be owned in the name of the parent

The employee/individual can pay rent to their parents and claim HRA deduction if their parents own the property. However, in the scenario where the employee resides with their parents in a rented accommodation and the parents pay the rent, the employee cannot claim the HRA deduction.

Rent should be deposited in the bank account of the parents or through cheques made out in favor of the parents

To avail the HRA exemption, the salaried individual must have proof of rent in the form of rent receipts, demonstrating the actual payment of rent to the parents. In such cases, it is advisable to use bank transfers or issue cheques in favor of the parents.  Including the rent you’ve paid for your parents on their tax returns is required.

"The rent should actually be paid  preferably by way of bank transfer because  law does not allow for deduction of rent on a notional basis. There should be actual payment of the rent," said - Ankit Jain, Partner, Ved Jain & Associates

Execution of rent agreements with parents

For the purpose of HRA exemption, the salaried employee should enter into a rent agreement with their parents, who are the owners of the house.

Rental income should be included in the total income of the parents

The rent paid to the parents is taxable for them under the category of 'income from house property.' The parents can claim property taxes paid by them and also avail a 30% standard deduction from this rental income.

If the parents fall in a lower tax bracket than the salaried individual claiming the HRA exemption, the family can save tax as a whole. Additionally, if the parents are over 60 years old, they may enjoy a higher minimum income exemption limit (Rs. 3 lakhs for those above 60 years old and Rs 5 lakh for those above 80 years old). If the parents have no taxable income, a significant amount of tax can be saved as a family.

HRA tax exemption can still be claimed if HRA is not part of the salary

If the HRA is not included in the individual's salary, they can still claim HRA deduction under Section 80GG. This Section is applicable to individuals who do not receive HRA as part of their salary, including self-employed individuals. The salaried individual can claim HRA under this Section by filling out Form 10BA. However, this can only be claimed if the individual resides in a rented accommodation and pays rent.

When do you require proof of PAN?

When filing for home rent allowance, if your annual rent is more than Rs 1 lakh, you must include copies of your rent receipts and your landlord’s PAN (HRA).

" The PAN of the parent who owns the house should be furnished to the employer. It is important to declare the rent received as  income while filing their tax return. The PAN of the landlord along with rent is reported to the tax authorities by the employer and the tax authorities corroborate the rent paid with the income declared to detect tax evasion. If the rent is not reported in the tax return of the parent, the parent or the son might receive a notice from the tax authorities," said  Ankit Jain, Partner, Ved Jain & Associates.

The Do's and don'ts of this rental arrangement with parents

"The dos include having a valid rental agreement, maintaining payment records, and ensuring parents declare rental income. Don'ts include avoiding excessive rent payments and circular flow of funds. Precautions involve upholding the landlord-tenant relationship and keeping necessary documents like PAN of the landlord if rent exceeds Rs 1 lakh," said  Ankit Rajgarhia, Principal Associate, Karanjawala & Company, Advocates.

Rajgaria illustrates this with an example: Twenty-year-old Aditya lived in New Delhi with his parents. His office was in Gurgaon and he commuted daily to his office from Dwarka. Aditya had recently started working, and his employer asked for tax saving declarations for FY 2023-24 to calculate TDS on salary. Aditya’s colleagues who lived in Gurgaon in PG accommodation were submitting rent receipts to claim HRA. HRA is paid to them as part of their salary. However, Aditya can claim the benefits under section 10 (13A) of the Income Tax Act, 1961 by showing that he staying in the rented property which belongs to his father and he is paying the rent for the same.

If you haven't been able to claim HRA from your employer?

If you are not able to submit the rent receipts in time to your employer and your employer deducts TDS on HRA, you’re still covered, said Clear. HRA exemptions can be claimed at the time of filing your income tax return. You can adjust your total taxable salary with the HRA exemption amount while filing your return.

Important points to note:

1. HRA cannot be claimed if the house is in the name of the spouse because as per the Income Tax Act, the husband and the wife live together.
2.  HRA is not available under the New Tax Regime
3. You can claim both HRA and home loan deduction of Rs 1.5 lakh against principal repayment and Rs 2 lakh against interest paid, if you are staying in a different city due to job posting.
4. Even if HRA is not part of your salary, you can claim an HRA deduction under Section 80GG. This  is applicable for those who do not receive HRA as part of their salary and self-employed individuals.
5. "TDS is required to be deducted if payment of rent exceeds Rs 50,000 per month," said Maneet Pal Singh, Partner, I.P. Pasricha & Co.
6. If planning to pay rent to parents for HRA benefit, the following must be entailed, said Abhinav Soomaney, Managing Partner, CryptoTax International.

- Execute a rent agreement between parents and yourself

- Pay rent and reside at the agreed location

- Parents must declare rental income in their ITR, potentially affecting their tax liability