Claiming HRA While Paying Rent to Family: Proposed Rule May Require Additional Proof

G GOWTHAM
House Rent Allowance (HRA) is a key component of salary that provides tax relief to individuals living in rented accommodations. However, when the rent is paid to family members, the Income Tax Department has proposed stricter documentation requirements to prevent misuse.

1. Current HRA Rules

  • Taxpayers can claim HRA if they live in rented accommodation and pay rent.
  • HRA exemption is calculated based on:
Actual HRA received

Rent paid minus 10% of salary

50% of salary if living in metro cities (40% for non-metros)

  • Currently, paying rent to a family member is allowed but requires a valid rental agreement and rent receipts.
2. Proposed Rule Changes

The proposed rule may include:

  • PAN Requirement: Rent paid to a family member may require the landlord’s PAN to be provided in the ITR.
  • Bank Transfers Only: Payments might need to be made via banking channels instead of cash.
  • Formal Rental Agreement: A legally valid agreement may be mandatory even if the landlord is a close relative.
These steps aim to curb tax avoidance through informal rent arrangements.

3. Documentation Needed

To claim HRA while paying rent to family, taxpayers may need:

  • Rent receipts signed by the family member with details of PAN, bank account, and rent amount.
  • Copy of the rental agreement showing the relationship, tenure, and rent terms.
  • Proof of payment through bank statements or wallet PLATFORM' target='_blank' title='digital-Latest Updates, Photos, Videos are a click away, CLICK NOW">digital transactions.
4. Implications for Taxpayers

  • Tax authorities may scrutinize HRA claims made to close relatives.
  • Non-compliance or lack of proper documentation may lead to denial of HRA exemption and additional penalties.
  • Early preparation of valid documents can prevent disputes during assessments.
5. Expert Advice

Tax consultants suggest:

  • Maintain formal rental agreements even with family members.
  • Make all payments via bank transfers and keep statements.
  • Collect monthly rent receipts with signatures and PAN details.
  • Consider HRA limits and salary components while calculating exemptions.
Conclusion

Paying rent to family and claiming HRA is allowed, but the proposed rules aim to formalize the process to avoid misuse. Taxpayers should ensure proper documentation, formal agreements, and digital payments to continue availing HRA benefits safely.

 

Disclaimer:

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk.

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