How to claim HRA exemption while staying with parents or relatives?

How to deal with the dilemma of comfortably living in your family home while claiming HRA exemption

How to claim HRA exemption while staying with parents or relatives

A salaried employee can claim exemption on the rent paid during the year (or part thereof) through House Rent Allowance (HRA) under section 10(13A) of the Income Tax Act as per the HRA rules. The Act also allows exemption on rent paid, even if there is no HRA component in the salary structure, by claiming deduction under section 80GG. 

Many salaried individuals live with their parents or relatives. Being a part of the family, one might wonder if HRA can be claimed in such cases, particularly since the rental income stays within the family. The short answer would be – yes, you can claim HRA allowance if you pay rent to a family member. However, you cannot be too casual about it just because the recipient is your family member.

As far as the Income Tax department is concerned, all the necessary formalities must be intact for you to be eligible for the HRA calculation and exemption. The rent arrangement should look bona fide in the eyes of the law.

Things to take care of

  • Payment: If you are staying with your parents or relatives and wish to claim HRA exemption, make sure that you do pay the rent. There should be a payment trail, so an account transfer or a cheque payment is recommended.
     
  • Ownership: The property must be owned, either jointly or wholly, by the relative receiving the rent. The recipient should either be a joint owner or the sole owner of the house. You cannot be the legal owner or co-owner of the rented house, as the tenant and the landlord cannot be the same person.
     
  • Documentation: A rental agreement and rent receipts are accepted as proof of the rental arrangement. In this case, too, you should have a rent agreement in place. You should have genuine rent receipts in place to attach as proof of rent payment to your employer. You will also have to provide the PAN of the relative if the rent paid is more than Rs 1 lakh in a year.
     
  • Tax on rental income: Your relative cum landlord will be liable to tax on the rent you have paid him or her. It is taxable under the head ‘Income from House Property’ and is eligible for a standard deduction of 30% under Section 24. This is the same section that also provides a deduction on home loan interest paid. You have to avoid cash payment of rent, and ensure that both you and your relative disclose this income (expense in your case) in your respective Income Tax returns. Remember, TDS is required to be deducted at 5% if the monthly rent exceeds Rs 50,000.
     
  • Home loan benefits: While claiming home loan tax benefit together with HRA, make sure that both the properties are not in the same locality. Renting a place near your office for commuting convenience is, however, allowable.
     
  • Rent on paper: If you are showing the property as rented accommodation, but using another address for all correspondences, the department may take exception to your claim. Your postal and correspondence address should concur with your accommodation address.

Related: Home loan vs HRA: Which offers higher tax savings?

To sum up, if all the compliances and formalities are taken care of, you can be eligible for HRA tax exemption despite living with your parents and relatives. See how to claim HRA benefits while you work from home?

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