Every salaried person is provided with house rent allowance (HRA) as a part of remunerations specified in the company contract. If a person lives in a house which is not owned by him/her and he/she pays rent to the owners, the government allows a tax deduction on such rent under section 10(13A) of the Income Tax Act, 1961. Those who live in rented homes and pay monthly rent can save tax under HRA.
HRA is used as an effective tax saving tool by many people even when they don’t live in a rented house. For the same purpose of tax saving, often people wonder if they can save tax by paying rent to their parents. You can successfully get a tax deduction under HRA by paying rent to your parents, but for the rent to be eligible for the deduction, it must fulfil certain criteria.
Points to remember while paying rent to parents
- House Ownership: For the rent to be eligible for the deduction, your parents must be the sole owners of the house. One of the parents may be an owner alone, but you mustn’t be included in the ownership of the house in any way. You must keep in mind that you should not be a co-owner of the house as you will not be eligible for a tax deduction on the rent paid to yourself.
- Transfer of amount/rent: For claiming a tax deduction, you must pay rent to your parents on a regular basis. You can do this by transferring the rent amount to the bank account of your parents or can pay them by writing a paycheck to them.
- Rent receipts: It is a common practice by employers to ask for the rent receipts if you are claiming HRA. For this, you can just ask your parents to give you a rent receipt for the amount you have paid to them as rent, or a bank statement indicating the transfer to your parent’s bank account. Once gathered, you can submit these receipts to the concerned department and claim your HRA.
- Your parents will have to pay taxes on the rental income: Keep in mind that your parents will be entitled to pay taxes on the amount you pay them as rent. This income will come under ‘Income from House Property’ and will be included in the taxable income of your parents. But the good thing about this process is that your parents can claim these property taxes that they will pay along with the 30% standard deduction from this rental income.
- Save tax as a whole: By paying rent to your parents, you can save a huge amount of taxes as a whole family. Your parents can save tax on amount paid for property taxes with the addition of 30% standard deduction. I.e. If you pay rent of Rs.1,20,000 to your parents annually and the property tax for the house is Rs. 20,000, net income becomes Rs. 1,00,000. 30% standard deduction is considered on net income of Rs. 1,00,000, making the final taxable income of Rs.70,000.. Apart from this, if their total taxable income is less than yours, they will come in a lower tax bracket, and as a result, the overall tax you will pay as a family will be lower. If you pay tax, you only get exemption up to Rs 2.5 lakhs, but if your parents are of 60 years or more, they will get an exemption up to Rs 3 lakhs or 5 lakhs in case they are of 80 years or more.
You may want to see which tax regime you want to opt for. Under the old tax regime, taxpayers were allowed to claim various deductions such as House Rent Allowance (HRA) to reduce their taxable income. However, with the introduction of the new tax regime, HRA deductions are no longer considered, and taxpayers can only claim standard deductions. This means that taxpayers who opt for the old tax regime will have a higher tax liability compared to those who opt for the new tax regime. Therefore, taxpayers need to carefully evaluate their options before deciding which tax regime to choose, taking into consideration their income, deductions, and other tax implications.
That was about parents. Even, if you are married and house property is owned by your wife, then also you can pay rent to her and claim HRA for tax exemption purpose.
So, if you have doubt that can I pay rent to my wife and claim HRA? Yes, you can.
By paying rent to your parents or wife, you can successfully save tax by claiming HRA, even if you live with your parents. If you are a salaried person and your parents are the sole owner of your house, you can use this method and can save tax by claiming a deduction under section 10(13A) of Income Tax Act, 1961.
Documents Required to Claim HRA
To claim HRA while living with parents, the following documents are required:
- Rent Receipts - Employers often request rent receipts as proof for HRA exemption.
- Rental Agreement - –Rental agreement is required if the rent paid is more than Rs.1,00,000/- annually. You can create a simple rental agreement with your parents and submit.
- Rent Receipt Generator - Utilize a rent receipt generator, to prepare receipts and submit them to HR/payroll department. You can print or save digital copies for your records. Make sure the receipt is duly signed by the owner of the house (in this case, your parent) or the person to which the payments are made.
It is crucial to keep accurate records as the assessing officer may ask for them.
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