Can HRA exemption be claimed on rent paid to parents?

Nidhi Arora, a resident of Mumbai has moved to Bangalore for a year owing to her job. She stays in her father’s apartment and pays him rent too. While Nidhi’s employer offers the HRA component as part of her CTC, she is unsure if she can claim the HRA exemption, especially because she is staying in her father’s house on rent. There are others who have the same query as Nidhi and the answer to this is yes. This guide will tell you eligibility criteria and steps to claim HRA exemption if you stay in a property belonging to your parents. 

What is HRA?

House Rent Allowance (HRA) is an allowance that is part of the CTC given by the employer to the employee so that the rented accommodation costs are covered. An HRA can be claimed only by salaried employees. Self-employed persons cannot claim HRA. 

HRA allowed only under old tax regime 

Anybody who wants to claim HRA exemption has to opt for old tax regime as the new tax regime does not cover any exemptions except for 

• National Pension Scheme (NPS) deposits (up to Rs 50,000) 
• Interest paid on home loans (up to Rs 2 lakh). 

Eligibility criteria for claiming HRA when rent paid to family members

A person can claim HRA by paying rent to his/her father, mother, siblings, spouse, in laws etc. To be eligible for claiming the HRA they have to fulfil the following criteria: 

• The person should be a salaried employee
• The person should actually pay rent for the property in which he/she is residing. This should be supported by rental agreement made with the family member and receipts received from the family member on payment of rent. 
• The person does not own any other residential property in the place of her employment. 

Key points to remember while claiming HRA exemption on rent paid to parents

• A person can claim HRA on only the rent paid to the property. No exemption can be availed for any money that has been paid towards repair or renovation of the rental property.
• The rent paid to parents should be according to market rental rate and what the employee is eligible according to her CTC. However note that if an employee is eligible for Rs 40,000 rent and he pays rent of Rs 40,000 to her family members when the current market rental rate is only Rs 19,000 then he may run a risk of explanation to the Income Tax (IT) department in case they flag him. 
• Since rent is paid to property owners, the property must be owned by one or both the parents. In case of other family members, it has to be paid on the person who owns it and who gives you receipt for the rent paid. The property can have a single owner or co-owners. 
• A person paying rent and claiming HRA exemption for a property cannot be the owner or co-owner of that property. 
• The rental income paid by you should be mentioned under ‘income from house property’ in your income tax return.
• In case the employee stays with her parents on a rented accommodation, and the father pays the rent, then the employee cannot claim HRA exemption on rent. 
• The rent is recommended to be paid through bank transfer as the rent has to be paid actually for the exemption to be availed. 
• Register the rental agreement and maintain all records.
• Keep the parents PAN Card handy as this may be declared if the annual rent is more Rs 10 lakh. 

Tax for parents getting rent

• As the rent is an income for the parents, it is taxable under income from house property. 
• The parents can avail 30% standard tax deduction from this rent. 
• In case parents age is more than 60 years, bigger minimum income exemption limit-Rs 3 lakh for 60 years and above, Rs 5 lakh for 80 years and above. 
• If parents have no taxable income, huge tax earned on this rental income will be saved. 
• They can also claim property taxes paid by them. 

Housing.com POV

To be able to claim HRA exemption on rent paid to family members is a great benefit that people can. To opt this, they need to pay their taxes according to the old tax regime. However, one should not exploit this benefit because there is always a risk of Income Tax department cracking down and issuing notice for explanation. If found guilty, heavy penalities will be attached .