Can I Pay Rent To My Parents To Save Tax?

HRA or House Rent Allowance is the most common allowance received by salaried individuals. Those who live on rent can maximise on saving tax by claiming a deduction for the HRA component from the salary. 

However many salaried or self-employed individuals stay with their parents. But can those living in their parent's house claim HRA exemption? Well, yes they can. Those who live with their parents can pay rent to their parents and save tax on HRA. This article will discuss in detail how to claim HRA while living in your parent's house.

It is important to note that HRA exemption can be claimed only by those taxpayers opting for the old tax regime. It is not applicable under the new tax regime.

What Does The Income Tax Act Say?

The Income Tax Act of 1961 permits claiming HRA exemption for rent paid to parents under certain conditions:

• Genuine Rental Agreement: A formal rental agreement is mandatory, outlining details like rent amount, duration, and payment mode.
• Proof of Payment: Rent should be demonstrably paid through bank transfers or traceable channels. Cash transactions are frowned upon.
• Ownership verification: The property must be solely owned by your parents. Joint ownership with you will make you ineligible for the deduction.
• Market-driven rent: The rent amount should be at market rates for similar properties in the locality. Inflated figures raise red flags and invite scrutiny.

How to Claim HRA by Paying Rent to Your Parents?

• You can pay rent to your parents if you are staying with your parents.
• This should be done by transferring the rent to their bank account or paying via a cheque. This way you will be able to claim your HRA deduction properly.
• Since rent is paid to owners, the property must be owned by your parents. It may be owned by one or both of your parents. So, you can deposit the money to any one of the parents in case of joint house ownership, or to the parent who is the legal owner of the house.
• Your parents should declare such Rental income in their ITR and pay tax according on the applicable slab rates. This has become very important ever since the introduction of AIS. If your parent does not declare such rent in their ITR it will attract scrutiny.
• Remember that you cannot be an owner or co-owner of this property since you cannot claim tax exemption on rent paid to yourself.

How to Calculate HRA Exemption?

The least of the following amounts can be claimed as HRA exemption:

• Actual HRA received 
• 50% of [basic salary + DA] for those living in metro cities (Delhi, Kolkata, Mumbai or Chennai)
• 40% of [basic salary + DA] for those living in non-metros
• Actual rent paid (-) 10% of [basic salary + DA]

Documents Required to Claim the HRA while Staying with Parents

• Rent agreement and rent receipts – Usually employers ask for a copy of the rental agreement for their records. They can also request the submission of rent receipts to allow you HRA exemption.
• You can enter into a simple rent agreement with your parents.
• You can prepare rent receipts by using ClearTax’s rent receipt generator. You can print these receipts and submit them to your HR/payroll department. You can also download them and save them on your computer.
• It is important to keep proper records in case the assessing officer asks for them.

HRA Claimed is Taxable for Parents

• Rent paid by you to your parents shall be taxable for them.
• The rental income paid by you is to be reported under the head ‘income from house property’ in their income tax return.
• However, they can claim property taxes paid by them and also claim a 30% standard deduction from this rental income.
• Since you would have given your parents PAN to claim HRA exemption with your employer, It will be reflected as a rental income in your Parent's AIS. Thus one can login to the income tax portal of the recipient of such rental income and check the status. Thus it is important for them to declare such income in their tax return. 

Benefits of Claiming HRA while Staying with Family

• Save tax as a family. By submitting rent receipts and paying them, you will be able to claim an exemption on HRA.
• Your parents can deduct property taxes and also claim a 30% standard deduction on the rental income.
• If they are in a lower tax bracket than you, the family can save tax as a whole.
• If they are more than 60 years old, they will also enjoy a higher minimum income exemption limit (Rs.3 lakh for those who are aged above 60 years and Rs.5 lakh for those who are aged above 80 years old under the old tax regime).
• In case they do not have any taxable income, you will be able to save significant tax as a family.
• Thus it is important to note that if your parents also fall in the 30% tax slab then this strategy might not result in any tax saving.

Example of Claiming HRA while Living with Parents

Example: Aditya aged 22 years lives in New Delhi with his parents.

His office was in Gurgaon and he commuted daily to his office.

Aditya had recently started working, and his employer asked for tax saving declarations for FY 2024-25 to calculate TDS on salary.

Aditya’s colleagues who lived in Gurgaon in PG accommodation were submitting rent receipts to claim HRA.

HRA is paid to them as part of their salary. However, Aditya is unsure if he can claim HRA since he lives with his parents.

Here is a calculation on how he can claim HRA while living with his parents;

Here are three cases in which we will understand how much HRA will be exempt if he pays rent to his parents.  You can use ClearTax HRA calculator to find out the HRA component you can claim. 

The tax saved by Aditya after claiming HRA exemption will be as follows: 

However, rent paid to Aditya’s father will have to be included in his father’s total income.

Let’s take Case 1, where Aditya decides to pay rent to his father, a sum of Rs 12,000 per month. His father’s rental income is Rs 1,44,000 for the whole financial year. Besides this income, his father has an interest income of Rs 3,00,000. His father is 65 years old.

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

Income tax calculation of father with and without rental income.

Total tax saved as a family = Rs 17,628 - Rs 5,132 = Rs 12,496

Final Word

Claiming HRA exemption by paying rent to your parents is one way how a salaried individual can save tax. But this has to be declared in the parent's ITR under Income From House Property. Claiming such an exemption without complying with tax provisions can attract scrutiny. Therefore, the taxpayer should be careful while claiming such an exemption. 

Related Articles:
1. HRA – House Rent Allowance – Exemption Rules & Tax Deductions
2. 5 things you must know about the most common allowance – HRA
3. HRA calculator