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How to claim HRA on rent paid to parents


Is a rent agreement necessary for claiming house rent allowance (HRA) exemption if you pay rent to your parents?  Is it sufficient to provide proof like rent receipts, direct credit of rent to parent’s bank account or TDS (tax deducted at source) on rent payments?

                       — Krishan Kumar


As per the provisions of Section 10(13A) of the Income-tax Act,1961, house rent allowance (HRA) exemption is not available where the accommodation occupied by the assessee is owned by him or the assessee has not actually incurred expenditure on payment of rent. Based on the limited facts provided, we assume that the parents are the legal and financial owners of the house property and the same is not owned by the assessee. Also, the assessee is actually paying rent to the parents.

As per the provisions of the Act, read with the Income-tax Rules, 1962, salaried individuals are required to furnish the specified particulars /evidence to the employer in Form 12BB in respect of claiming specified exemptions/deductions. For HRA exemption, an individual is required to provide to his employer, name, address and PAN (where the aggregate annual rent paid exceeds 1 lakh) of the landlord.

Further, as the onus is on the employer to withhold appropriate taxes from the employee, they are obligated to collect sufficient documentation to verify the claims of exemptions / deductions made by the employee. Though there is no specific list of documents prescribed, the employer may also ask for details like rent agreement, rent receipts, mode of payment, etc., before allowing this deduction. In the absence of documents, this deduction may be disallowed at the tax withholding stage. In case this is disallowed, depending on the facts and merits of the case, one can claim HRA deduction when filing income tax returns. However, please note that the same may be further probed by tax authorities.

In case the tax return is selected for scrutiny, the tax officer may also seek documentary evidence (as he may deem fit) in respect of HRA claimed. Hence, it is advisable to maintain the following documentation towards the HRA claim:

• Registered and notarized rent agreement, as applicable

•Rent receipts

•Payments via banking channels

• Cash payments backed by known sources / traceable to specific withdrawals from the bank account

•Disclosure of rental income in landlord’s ITR (including landlord’s PAN)

It is worthwhile to note that claiming of HRA exemption in respect of rental payments made to parents / spouse/ relatives may be prone to litigation, thus it is important to maintain adequate supporting documentation to substantiate the genuineness of such transactions.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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