Income Tax

Can I pay rent to my parents to save tax?

The most common type of allowance a salaried person receives is House Rent Allowance (HRA). Those who live in a rented property can maximize their tax savings by claiming a deduction of HRA from their salary. However, many salaried individuals stay with their parents. Then arises a question about how to claim HRA if you live with your parents. The simple answer is that people who live with their parents can pay rent to their parents and save tax on HR. In this blog, we will find out how.

What is HRA?

HRA stands for House Rent Allowance. Salaries of employees are structured with various components allocated for different expenses. HTA is one such allowance. HRA can be predetermined or determined through a special agreement between you and your employer. HRA constitutes a part of the earnings the employer grants to meet the costs linked with leased housing. The option to get an exemption on HRA is available exclusively if you reside in a rented house. The exemption of HRA falls within the provisions of Section 10(13A), read with Rule 2A of the Income Tax Act, 1961.

How to claim HRA by paying rent to your parents?

• If you are a salaried person and live with your parents, then you can pay rent to your parents.
• To claim your HRA deduction properly, you have to transfer the amount of rent to their bank account or pay via a cheque.
• As the rent is paid to owners, the property must be owned by either one or both of your parents. In case of joint ownership, you can deposit the amount of rent to any of your parents or the parent who is the legal owner of the house.
• It would help if you were not an owner or co-owner of the property, as you cannot claim an exemption on rent paid to yourself.

Documents required to claim HRA while staying with parents

• Rent agreement or rent receipts – The employer asks for a copy of the rental agreement and rent receipts for their records to allow you HRA exemption.
• You can enter into one rent agreement with your parents.
• You can prepare and submit the rent receipts to your HR/payroll department.
• Maintaining proper records is essential if the assessing officer asks for them.

HRA claimed is taxable for parents

• Rent paid to parents shall be taxable for them.
• The rental income paid is to be reported under the head ‘income from house property’ in your parent’s income tax return.
• Parents can claim property taxes paid by them and also get a standard deduction of 30% from rental income.

Benefits of claiming HRA while staying with family

• It saves tax as a family. You can claim exemptions by submitting rent receipts.
• Your parents can deduct property taxes and also claim a standard deduction of 30% on the rental income.
• The entire family can save taxes if your parents are in a lower tax bracket.
• Suppose your parents are more than 60 years old. They will enjoy a higher minimum income tax exemption limit as the exemption limit is INR 3 lakh for those above 60 years of age and INR 5 lakh for those above 80.
• If your parents do not have any taxable income, you can save a significant amount of tax.

Illustration on how to claim HRA while living with parents

Example: 23-year-old Abhishek resided in New Delhi with his parents. His office was in Noida, and he used to commute daily to his office from New Delhi. Abhishek has recently started working, and his employer asked for tax saving declarations for FY 2019-20 to calculate TDS on salary. Abhishek’s colleagues living in a PG in Gurgaon were submitting rent receipts to claim HRA. HRA is paid to them as a part of their salary. However, Abhishek was unsure if he could claim HRA¹ since he lived with his parents. The details of their salary earned by him is as follows:-

Basic Salary	INR 3,00,000
HRA	INR 1,50,000
Special Allowance	INR 1,65,000
Total	INR 6,15,000
Less: Standard Deduction	INR 40,000
Total Taxable Income	INR 5,75,000
Total Tax	INR 27,500
Cess @ 4%	INR 1,100
Total Tax Payable	INR 28,600

Now, let’s find out how much HRA will be exempt if Abhishek decides to pay rent to his parents:-

HRA exemption calculation	Case 1	Case 2	Case 3
Rent paid	INR 12,000	INR 12,500	INR 13,000
HRA per month	INR 12,500	INR 12,500	INR 12,500
50% of the basic salary	INR 12,500	INR 12,500	INR 12,500
Actual rent paid – 10% of the basic salary	INR 9,500	INR 10,000	INR 10,500
HRA exempt portion (least of B, C & D)	INR 9,500	INR 10,000	INR 10,500
HRA taxable portion	INR 3,000	INR 2,500	INR 2,000

Revised Taxable Salary

Basic Salary	INR 3,00,000	INR 3,00,000	INR 3,00,000
Taxable HRA	INR 36,000	INR 30,000	INR 24,000
Special Allowance	INR 1,65,000	INR 1,65,000	INR 1,65,000
Total Salary	INR 5,01,000	INR 4,95,000	INR 4,89,000
Less: Standard Deduction	INR 40,000	INR 40,000	INR 40,000
Total Taxable Salary	INR 4,61,000	INR 4,55,000	INR 4,49,000
Total Tax	INR 10,500	INR 10,250	INR 9,950
Cess @ 4%	INR 422	INR 410	INR 398
Total Tax Payable	INR 10,972	INR 10,660	INR 10,348
Tax Saved	INR 17,628	INR 17,940	INR 18,252

The rent paid to Abhishek’s father will be included in his father’s total income.

Let’s consider Case 1, where Abhishek decides to pay his father a sum of INR 12,000 monthly rent. His father’s rental income is INR 1,44,000 for the financial year. Apart from this, his father has an interest income of INR 3,00,000. The age of his father is 62 years.

Let’s find out the taxable income of Abhishek’s father before receiving rent and after receiving rent from Abhishek.

Taxable Income of Abhishek’s father		With rental income	Without rental income
Interest Income		INR 3,00,000	INR 3,00,000
Rental income	INR 1,44,000
Less: Taxes Paid	INR 3000
Less: 30% standard deduction	INR 42,300	INR 98,700	–
Total Taxable Income		INR 3,98,700	INR 3,00,000
Total Tax		INR 4,935	–
Cess		INR 197	–
Total Tax Payable		INR 5,132	–

Total tax saved as a family = INR 17,628 – INR 5,132 = INR 12,496.

Points to Keep in Mind While Paying Rent to Parents

• House Ownership: Your parents must be the sole owners of the house to claim the deduction. You must not be included in the ownership of the house, or else you will not be eligible for a tax deduction on rent paid to yourself.
• Transfer of Amount/rent: To claim an HRA deduction, you must pay rent to your parents regularly. This can be done by sending the rent to your parent’s bank account or paying them by writing a paycheck.
• Rent Receipts: The employers ask for rent receipts if you claim HRA. Your parents can prepare rent receipts of the amount paid to them as rent or show a bank statement reflecting the transfer to your parent’s bank account. Once you have gathered them, you can submit these rend receipts to the HR/payroll department and claim your HRA.
• Your parents will bear the taxes on the rental income: The income from rent will come under the ‘Income from House Property’ and will be a part of the taxable income of your parents. Your parents can claim a 30% standard deduction from this rental income.
• Save Tax as a whole: You can save tax as a whole family by paying rent to your parents. Your parents can save tax on the amount paid for property taxes in addition to a 30% standard deduction.

Conclusion

It is concluded that HRA is an effective tax-saving tool for many people even when they don’t live in a rented house. Every salaried person receives a house rent allowance as a part of their remuneration specified in the company contract. The government permits a tax deduction on those rents per section 10(13A) of the Income Tax Act. 

FAQs

1. https://incometaxindia.gov.in/Pages/tools/house-rent-allowance-calculator.aspx