Renting a property enables the property owner to earn rental income and enjoy tax benefits under Sector 24 of the Income Tax Act. In India, a tenant (a person or an entity that rents a property) also enjoys tax benefits through House Rent Allowance under Section 10 (13A). A property can be rented by an individual, family member, or even business member. An easy way by which people maximise their tax savings is by claiming HRA benefits from rent paid to parents or family members. Many people prefer to rent their property to family members to save on brokerage costs and avoid the common problems one might face with other tenants. In this guide, we will discuss the legal, tax and financial implications of renting out property to family members.
Advantages of renting to family members
- Trust and familiarity: Renting a property to family members is considered a secure option by most landlords since they know them well. The familiarity and trust are the main reasons why people rent properties to family members.
- Less chances of disputes: Since the tenants are known to the landlord, there is scope for better communication, resulting in easier resolution of disputes or no disputes at all. Usually, this can also help strengthen family ties and an understanding between both parties.
- Financial benefits: Usually, families who take a property on rent look for long-term rental term agreement. This is beneficial to both parties (the tenant and the landlord). It ensures a steady rental income for the property owner with potential tax benefits.
- Flexibility with rental terms: Family members as tenants can be more flexible with the rental terms, including the rental tenure, rent payment schedules, property maintenance, etc.
Disadvantages of renting to family members
- Emotional or financial dependency: While there are positive aspects to renting out a property to family members, it is also believed to have negative consequences for some people. There could be excess financial or emotional dependency on the family member for housing, which might strain the relationship.
- Difficulty in enforcing lease terms: While there is a chance of fewer disputes by renting the property to family members, on the other hand, family members may take advantage of the relationship by not paying rent on time or neglecting property upkeep. This might affect relationships due to disagreements over rental terms, property maintenance, etc.
- Risks of disputes without rental agreements: It is possible that one rents out the property to a family member without signing a formal rental agreement. This could result in legal issues such as eviction. Moreover, residing in proximity to family members could result in disputes over personal space and privacy.
- Potential loss of rent: If the property owner rents out the property at a lower rate than the market rate, it could lead to a potential loss of good rental earnings and the tax benefits that come with it.
Importance of rent agreement when renting property to family members
According to the laws, a formal rental agreement should be signed between the landlord and the tenant, specifying all the tenancy terms and conditions. This includes the rent amount, security deposit, rent payment frequency, maintenance, notice period, eviction terms, etc. In India, there are several laws, such as the Model Tenancy Act and state-specific rent control acts, which protect the interests of tenants and landlords. In the absence of a rental agreement, it becomes difficult to seek legal remedy in case of any dispute. Thus, it is important to have a proper rent agreement in place when renting a property. Moreover, one should register the rent document if the tenure is one year or above to give it legal validity. If the tenure is 11 months or less, one should get the agreement notarised or follow the state-specific law to prevent potential disputes or legal hassles.
Can you pay rent to family members to save tax?
According to Section 10 (13A) of the Income Tax Act, salaried persons can claim tax exemptions for House Rent Allowance (HRA), an allowance given by employers to help the employee cover the cost of living in rented accommodation. Many salaried professionals reside with their parents and aim to save their taxes by claiming HRA benefits. One crucial point to note here is that the HRA exemption is allowed only if one opts for the old tax regime.
To claim the HRA benefit on rent paid to family members like parents, the employee must fulfil the following conditions:
- Reside in rented accommodation owned by the family member (in this case, mother and father or one of them)
- Pay a monthly rent to the landlord by depositing money to any of the parents in case of joint ownership or one of the parent who is the legal owner of the property
- The parents should declare such rental income in their income tax returns (ITR) and pay tax according to the slab rates
- The employee should not be the owner or co-owner of the property where they are residing on rent and for which they are claiming the HRA benefit
- Receive the HRA benefit as part of their CTC
- Submit valid rent receipts and proof of rent payment paid through bank transfer or traceable modes (unlike cash payments without proper receipts)
- Pay rent at market rates (rates applicable for similar properties in the locality)
- Submit the landlord’s PAN with your employer to claim HRA exemption
Rent paid to family members is taxable for the property owners
The rent one pays to the family member or parents is taxable for the property owner. When filing the income tax return, the rental income must be reported under the head ‘income from house property’. However, the owner can claim property taxes paid by them and claim a 30% standard deduction from this rental income.
Tax benefits for property owners on rental income
- Standard deduction: Property owners are eligible for a 30% standard deduction on the net annual value of the property. This enables them to save on expenses such as repairs and maintenance, irrespective of the actual expenses.
- Property taxes: The property taxes and municipal taxes paid by the property owner in a year are deductible from their gross rental income if the amount is paid by them and not by the tenant.
- Home loan interest deduction: According to Section 24 (B), the property owner can claim interest paid on the home loan as a deduction. In the case of rental properties, there is no upper limit on the interest deduction.
- Pre-construction interest: One can claim tax deduction for interest paid on a home loan during the construction period, divided into five equal instalments starting from the year the property is completed.
- Vacancy loss: In case the property was vacant for part of the year and the owner was unable to rent it out, they can claim the vacancy loss, which helps reduce their taxable income.
According to the Union Budget 2025-26, taxpayers will be allowed to claim the annual value of two self-occupied properties as ‘nil’ without having to fulfil any conditions. That is, there will be no tax on notional rental income from these properties. Currently, one can claim the annual value of self-occupied property as nil only under specific conditions, for example, if the taxpayer resides in the property or is unable to occupy it due to employment, business or professional reasons. This benefit will be available through an amendment to Section 23 of the Income Tax Act.
Tips to follow when renting property to family members
- Draft a formal rental agreement: As per the law, it is necessary to sign a formal rental agreement with the tenant if a property owner plans to rent out the property. Even if the tenant is a family member, one should consider this as a standard landlord-tenant relationship.
- Set clear expectations: Before the tenant moves into the rented property, it is important for the landlord to set clear expectations by reiterating the terms and conditions of the tenancy. This will not only financially benefit the landlord but prevent any negative impact on the relationship.
- Maintaining documentation: It is also essential to keep a proper record of your communication with the tenant, including transactions and other property-related matters. This will protect the interests of both parties and prevent disputes.
- Know the tax benefits: Property owners should be aware of the tax benefits they can get from the rental income. They should follow proper valuation methods to determine the right rental value based on the market trends.
Housing.com News Viewpoint
It may or may not be the best choice for a property owner to rent out their property to a family member since it will depend on the equation one shares with the family member. However, by signing a formal agreement and setting the expectations from the beginning will help ensure a smooth tenancy and prevent potential disputes. Moreover, the landlord should be aware of their tax liabilities and the benefits to secure their finances.
FAQs
How is rental income taxed?
Rental income is taxed based on the annual value of the property, the higher of the actual rent obtained or expected rent, after allowing standard deductions and other expenses.
Is paying rent to parents legal?
Yes, paying rent to parents is legal. If you want to claim HRA on the rent paid to parents, you must fulfil a set of conditions. This includes residing in the property owned by your parents (whoever is the legal owner), paying a monthly rent to them through proper channels like digital transfer and having the HRA benefit as part of the CTC given by the employer.
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