Can you claim HRA if you support your parents by paying rent? Or split costs with your spouse through a rental agreement? The key lies in proving a genuine tenancy agreement and avoiding tax-rule red flags. Let’s decode how to make it work.
How to Claim HRA by Paying Rent to Your Parents or Spouse?
You can claim House Rent Allowance (HRA) tax benefits by paying rent to your parents, provided you follow these steps and legal requirements:
Eligibility Criteria
- Residency : You must live in the house for which you pay rent.
- Ownership : The house must be legally owned by your parent(s)/ spouse. You cannot be an owner or co-owner.
Steps to Claim HRA
| Step | Details |
|---|---|
| Formal Rental Agreement | – Draft a written agreement stating rent amount, duration, and terms. – Ensure the rent is close to market rates to avoid tax scrutiny. |
| Payment Method | – Pay rent via bank transfer, cheque, NEFT, or RTGS. – Avoid cash payments due to lack of traceability. |
| Documentation | – Collect monthly rent receipts from parents. – Receipts should include amount, dates, and duration. – Submit receipts and agreement to employer. |
| Tax Compliance for Parents | – Parents must declare rent received under “Income from House Property” in their ITR. – Tax is payable as per their income tax slab. |
Notes
- Joint Ownership : If both parents own the house, split the rent proportionally, and both must declare their share in ITRs.
- Avoid Tax Avoidance : The arrangement must be genuine. Fake agreements or inflated rents may attract penalties.
- AIS Reporting : Since 2021, the Annual Information Statement (AIS) tracks high-value transactions. Ensure your parents report rental income to avoid mismatches.
Suggested Read: Karnataka Rent Control Act
How is HRA Calculated?
HRA (House Rent Allowance) is not fully tax-exempt. The amount you can claim as exemption is the lowest of the following three:
- Actual HRA received from your employer
- Rent paid minus 10% of your basic salary
- 50% of your basic salary (if you live in a metro city) or 40% (if in a non-metro city)
The balance HRA amount—after the exempt portion—is added to your taxable income. To make this easier, you can use an HRA calculator to check exactly how much exemption you’re eligible for.
Suggested Read: How to Include Your Rental Income in IT Returns?
HRA Calculation Case Study
Priya lives in Jaipur (non-metro city) .
- HRA received from employer : ₹80,000 per year.
- Basic salary : ₹40,000 per month.
- Monthly rent paid : ₹12,000.
Step-by-Step Calculation :
| Sl. No. | Head | Calculation | Amount (₹) |
|---|---|---|---|
| 1 | Actual HRA received | As per salary | 80,000 |
| 2 | Rent paid minus 10% of salary | (₹12,000 × 12) – 10% of (₹40,000 × 12) | 96,000 |
| 3 | 40% of basic salary (non-metro) | 40% of (₹40,000 × 12) | 192,000 |
Exemption Amount: The lowest value from the above (₹80,000).
Conclusion: Priya can claim ₹80,000 as tax-exempt HRA. The remaining HRA (if any) would be taxable, but in this case, the entire HRA is exempt.
Suggested Read: TDS on Rent Limit
Documents Required to Claim HRA While Staying with Parents
- Rent Agreement: A rental agreement between you and your parents stating the rent amount and duration.
- Rent Receipts: Monthly rent receipts signed by your parents, mentioning the amount, date, and rental period.
- Proof of Payment: Bank statements or digital transaction records showing rent paid to your parents.
- PAN of Landlord (if rent exceeds ₹1 lakh/year): If annual rent paid is over ₹1 lakh, your parent’s PAN must be submitted.
- Record Maintenance: Keep copies of all documents for verification if requested by the Income Tax Department.
Suggested Read: What to Include in a Rental Agreement?
Is HRA Claimed is Taxable for Parents?
When you pay rent to your parents to claim HRA, that amount becomes taxable income for them. They must report it under the head ‘Income from House Property’ in their Income Tax Return (ITR).
The good news is, your parents can reduce their tax liability by:
- Claiming a 30% standard deduction on the rental income, and
- Deducting property tax paid (if any).
Since you would have submitted your parent’s PAN to your employer for HRA exemption, this rental income will show up in their Annual Information Statement (AIS). It’s important that your parents log in to the income tax portal, verify the income details, and report it correctly in their ITR.
Suggested Read: How to Save Tax on Rental Income?
Advantages of Paying Rent to Your Spouse or Family
| Benefit | Details |
|---|---|
| Tax Saving for You | You can claim HRA exemption by paying rent to your parents. |
| Tax Benefits for Parents | They can claim property tax deduction and 30% standard deduction on rental income. |
| Lower Tax Bracket Advantage | If your parents are in a lower tax slab, the overall family tax burden is reduced. |
| Senior Citizen Exemption | Parents above 60 get ₹3 lakh exemption; above 80 get ₹5 lakh exemption. |
| No Taxable Income Case | If parents have no taxable income, the family can save significant tax. |
| Limitation | If parents fall in the 30% tax bracket, the strategy may not result in tax savings. |
Suggested Read: Rent vs. Buy Calculator
Case Study: Claiming HRA Exemption by Paying Rent to Family
Arjun, a 24-year-old software engineer, lives with his parents in Bengaluru (metro city). His office is in the same city, and he commutes daily. Arjun’s employer offers HRA as part of his salary. He wants to claim HRA by paying rent to his parents. His father, a senior citizen (68 years old), has an annual interest income of ₹2,00,000.
Arjun’s Salary Breakdown (FY 2024-25):
| Component | Amount (₹) |
|---|---|
| Basic Salary | 4,80,000 |
| HRA | 2,40,000 |
| Special Allowance | 2,00,000 |
| Total Salary | 9,20,000 |
Key Calculations:
- Standard Deduction : ₹50,000
- HRA Exemption Rules :
- Least of:
a. Actual HRA received (₹2,40,000/year).
b. 50% of basic salary (₹2,40,000).
c. Actual rent paid – 10% of basic salary.
- Least of:
Case 1: Rent Paid to Parents = ₹15,000/month
Step 1: HRA Exemption Calculation
| Component | Formula/Calculation | Amount (₹) |
|---|---|---|
| Rent Paid (A) | ₹15,000 × 12 months | 1,80,000 |
| 50% of Basic Salary (B) | 50% × ₹4,80,000 | 2,40,000 |
| Actual Rent – 10% Basic Salary (C) | ₹1,80,000 – (10% × ₹4,80,000) | 1,32,000 |
| Exempt HRA (Least of A, B, C) | Min(₹1,80,000, ₹2,40,000, ₹1,32,000) | 1,32,000 |
| Taxable HRA | ₹2,40,000 – ₹1,32,000 | 1,08,000 |
Step 2: Arjun’s Taxable Income
| Component | Amount (₹) |
|---|---|
| Basic Salary | 4,80,000 |
| Taxable HRA | 1,08,000 |
| Special Allowance | 2,00,000 |
| Gross Total Income | 7,88,000 |
| Less: Standard Deduction | 50,000 |
| Taxable Income | 7,38,000 |
Step 3: Arjun’s Tax Calculation
| Income Slab | Tax Rate | Taxable Amount (₹) | Tax (₹) |
|---|---|---|---|
| ₹0–2.5L | 0% | 2,50,000 | 0 |
| ₹2.5L–5L | 5% | 2,50,000 | 12,500 |
| ₹5L–7.5L | 10% | 2,50,000 | 25,000 |
| ₹7.5L–7.38L | 10% | 2,38,000 | 23,800* |
| Total Tax | 61,300 | ||
| Cess (4%) | 2,452 | ||
| Total Tax Payable | 63,752 |
₹7,38,000 – ₹5,00,000 = ₹2,38,000 taxable at 10%.
Step 4: Father’s Tax Liability
| Component | Amount (₹) |
|---|---|
| Rental Income | 1,80,000 |
| Deductions (30% of Rental Income) | 54,000 |
| Net Rental Income | 1,26,000 |
| Interest Income | 2,00,000 |
| Total Income | 3,26,000 |
| Tax Calculation (Senior Citizen) | |
| ₹0–3L | 0% |
| ₹3L–3.26L | 5% of ₹26,000 |
| Cess (4%) | 4% of ₹1,300 |
Step 5: Family Tax Savings
| Component | Amount (₹) |
|---|---|
| Original Tax Without HRA Exemption | 1,00,980 |
| New Tax After HRA Exemption (Arjun) | 63,752 |
| Tax Saved by Arjun | 37,228 |
| Father’s Tax Paid | 1,352 |
| Net Family Tax Saving | 35,876 |
Summary:
- By paying ₹15,000/month rent to his parents, Arjun reduces his taxable income and saves ₹37,228 in taxes.
- His father pays ₹1,352 in tax on the rental income, resulting in a net family tax saving of ₹35,876.
Suggested Read: Why 11 – Month Rental Agreements Are Common in India
Conclusion
Claiming HRA by paying rent to your parents or spouse can offer significant tax savings if done correctly. Ensure a genuine tenancy agreement, proper documentation, and compliance with tax rules. This strategy can reduce your taxable income and result in family tax benefits, but both parties must report the rental income accurately.
Frequently Asked Questions
Yes, if you have multiple employers providing HRA. However, the total HRA exemption is capped at the minimum of:
Actual HRA received.
Rent paid minus 10% of basic salary.
50% of basic salary (metro cities) or 40% (non-metro cities)
Yes, but only if both spouses are employed and pay rent for separate residences. If they share the same rented accommodation, only one spouse can claim HRA. The claim is based on individual salaries and rent paid, but the total rent paid must align with the household’s actual expenses.
Yes, under certain conditions Section 80GG allows a deduction for rent paid if:
You do not own a residential property in the city where you reside.
Your parents are the owners of the residence
No, this arrangement does not qualify for HRA exemption. A self-occupied property is one where the owner resides, and HRA is intended for rented accommodation where the tenant does not own the property. Paying rent to your spouse for a self-occupied property is not recognized for tax purposes.
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