Income Tax

Can I pay rent to my parents to save 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.
READ  Assessment and Reassessment Notice under Section 148 of Income Tax Act

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:-

READ  Pan-Aadhaar Linking – Final Extension Granted by CBDT up to 31st March 2020
Basic SalaryINR 3,00,000
HRAINR 1,50,000
Special AllowanceINR 1,65,000
TotalINR 6,15,000
Less: Standard DeductionINR 40,000
Total Taxable IncomeINR 5,75,000
Total TaxINR 27,500
Cess @ 4%INR 1,100
Total Tax PayableINR 28,600

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

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

Revised Taxable Salary

Basic SalaryINR 3,00,000INR 3,00,000INR 3,00,000
Taxable HRAINR 36,000INR 30,000INR 24,000
Special AllowanceINR 1,65,000INR 1,65,000INR 1,65,000
Total SalaryINR 5,01,000INR 4,95,000INR 4,89,000
Less: Standard DeductionINR 40,000INR 40,000INR 40,000
Total Taxable SalaryINR 4,61,000INR 4,55,000INR 4,49,000
Total TaxINR 10,500INR 10,250INR 9,950
Cess @ 4%INR 422INR 410INR 398
Total Tax PayableINR 10,972INR 10,660INR 10,348
Tax SavedINR 17,628INR 17,940INR 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.

READ  ITR Refund: Know about the Easiest way to Calculate and Claim it

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 incomeWithout rental income
Interest Income INR 3,00,000INR 3,00,000
Rental incomeINR 1,44,000  
Less: Taxes PaidINR 3000  
Less: 30% standard deductionINR 42,300INR 98,700
Total Taxable Income INR 3,98,700INR 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. Can I pay rent to my parents for tax deduction?

    Yes, any rent paid to the parents shall be eligible for the benefit of HRA tax exemption.  

  2. Can I pay rent to my parents and claim 80GG?

    Yes, you can become a tenant at your parent's house, pay rent to your parents, and claim that rent under section 80GG deductions.

  3. Can I claim a deduction under section 80GG without proof?

    The following documents are needed to claim a deduction under section 80GG:
    i. Rent receipts
    ii. Rent agreements
    iii. Declaration in Form 10BA
    iv. PAN of the Landlord
    v. Other supporting documents

References

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

Trending Posted