Based on the provided article and my research on the latest tax rules for the financial year 2024-25 (Assessment Year 2025-26), here is a rewritten post about claiming HRA by paying rent to your parents.
Claiming HRA by Paying Rent to Your Parents? Do It Right to Avoid an Income Tax Notice
Claiming House Rent Allowance (HRA) is a popular way for salaried individuals to reduce their tax burden. A common practice is paying rent to parents to claim this deduction, which is perfectly legal under Section 10(13A) of the Income Tax Act. However, with the Income Tax Department’s increasing use of AI and data-matching tools, the scrutiny on such claims has intensified. To ensure your claim is legitimate and doesn’t get you in trouble, you must follow the rules precisely.
Here’s a breakdown of the essential steps and what to avoid:
What You Must Do
- Create a Formal Rent Agreement: A verbal agreement is not enough. You must have a formal rent agreement with your parents that specifies the monthly rent, the tenancy duration, and the address of the property. This document formalizes the arrangement and serves as key proof.
- Make Genuine Rent Payments: The rent must be a real transaction. Pay the rent monthly through a traceable channel like a bank transfer or UPI. Avoid cash payments, which are difficult to prove, and do not make a single, lump-sum transfer at the end of the financial year.
- Your Parents Must Declare the Rental Income: The rent you pay is income for your parents. They must report this rental income under “Income from House Property” in their own Income Tax Return (ITR). They can still claim a 30% standard deduction on this income. Failing to declare this income is a major red flag for the tax department.
- Provide Your Landlord’s (Parents’) PAN: If the annual rent you pay exceeds ₹1 lakh (or approximately ₹8,333 per month), it is mandatory to provide your parents’ PAN details to your employer. The ITR portal also requires this information for claims of this amount.
Common Mistakes to Avoid
- Claiming Rent Without Proof: Just showing a deduction on paper without a verifiable trail of rent payments is a guaranteed way to attract a tax notice.
- Verbal Arrangements: Without a written rent agreement, your claim has no legal standing.
- Last-Minute Transfers: Transferring a large sum of money to your parents just before the end of the financial year to “catch up” on rent is a major red flag.
- Parents Skipping ITR Declaration: If your parents don’t declare the rent as income, their tax records will not match yours, leading to a mismatch that is easily caught by the tax department’s systems.
- Claiming HRA Under the New Tax Regime: The HRA deduction is only available if you choose the old tax regime. It is not permitted under the new tax regime.
Documents to Keep Handy
- Rent agreement on stamp paper.
- Monthly rent receipts signed by your parents.
- Bank statements showing the rent transfers.
- Your parents’ PAN details (if applicable).
- Your parents’ ITR as proof that they have declared the rental income.
Remember, the key to a successful HRA claim when paying rent to your parents is genuineness and a clear paper trail. The tax department is focused on cracking down on fraudulent claims, so it’s better to be fully compliant than to face penalties later.