- Date : 23/06/2023
- Read: 3 mins
Did you know that by paying rent to your parents, you can slash your tax bill significantly? Read on to learn more!
- Parents must be legal titleholders.
- Rent income is taxable.
- Tax savings depend on parents' income bracket.
- Proper documentation is essential.
Are you aware of the incredible tax-saving potential when it comes to paying rent to your parents? Many individuals may not realise that under certain circumstances, income tax on house rent can be significantly reduced. But how much rent is actually tax-free, and is it permissible to pay rent to your own parents? This article will explore the fascinating realm of tax-saving investments through rent payments, unravelling the benefits, legalities, and guidelines to help you navigate this financial opportunity wisely.
Also Read: Tax-saving components of your CTC
How much HRA deduction can you claim?
To make sure that you are actually saving money by paying rent to your parents, you need to know the minimum amount of your House Rent Allowance (HRA) that can be exempted from tax. This amount is the lowest of the following three:
- The amount of HRA that your employer pays you.
- 40% of the basic salary for non-metro cities and 50% of the basic salary for metro cities (i.e. Delhi, Chennai, Kolkata, and Mumbai)
- Annual rent paid less than 10% of the annual basic salary
Let’s take an example
Rajesh works in Lucknow and pays a monthly rent of INR 7,000 for his accommodation. His monthly salary is INR 45,000, (Basic pay - INR 25000, HRA - INR 8500, allowances - INR 8500, and PF - INR 3000).
As per the HRA calculation formula:
- Rajesh gets an annual HRA of INR 102000 (8500x12).
- Lucknow is non-metro, therefore 40% of basic pay would be INR 120000 (40%x25000x12).
- An annual rent of INR 84000 (INR 7000x12) and after subtracting 10% of basic INR 30000, the actual HRA is INR 54000.
The maximum HRA deduction that Rajesh can claim under section 80C of the IT Act as HRA deduction would be the lowest of the three amounts, which is INR 54000.
The remaining INR 48000 of HRA allowance will be taxable based Rajesh's tax slab.
Tax benefits for parents
Rent income in the hands of parents is taxable. The amount of tax your parents pay will depend on their income slab and the deductions they are eligible for. Various tax exemptions are available, such as municipal taxes, interest paid on home loans, and standard deductions. If rental income is less than ₹2.5 lakhs, tax may not be applicable (no other source of income or very less other income).
Precautions for benefiting from paying rent to parents
- Parents should be legal titleholders of the property
- If monthly rent exceeds INR 8333, sign the rental agreement and pay rent by cheque and obtain rent receipts
- To save on taxes, exclude maintenance charges (if applicable) from rent and pay directly to the society/association.
Read More: Paying 30% tax on income? Choose from these tax-saving options!
To save tax on rent paid to parents, ensure they are legal titleholders. Rental income is taxable, but deductions are available. Proper documentation and reasonable commuting distance are crucial for HRA exemption. Exclude maintenance charges from rent to reduce taxable income.
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