Can I Pay Rent To My Parents To Save Tax?

Updated on: Apr 12th, 2024

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27 min read

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

However many salaried or self-employed individuals stay with their parents. Are you unsure about how to claim HRA if you live with your parents? Those who live with their parents, can pay rent to their parents and save tax on HRA.

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 for new tax regime.

Let’s find out how.

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 parent(s) – joint ownership with you nullifies 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 money (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 to the slab rates. This is very important ever since the introduction of AIS, If your parent do 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.

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 recipient of such rental income and check the status. Thus it is very important that they declare such income in their ITR . 

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 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 have aged above 60 years old and Rs.5 lakh for those who are aged above 80 years old).
  • 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 falls in 30% tax slab then this strategy might not result in any tax saving.

Example of Claiming HRA while Living with Parents

Example: 22-year-old Aditya lived in Dwarka, New Delhi with his parents.

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

Aditya had recently started working, and his employer asked for tax saving declarations for FY 2022-23 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;

Basic Salary

   3,00,000

HRA

   1,50,000

Special Allowance

   1,65,000

Total

      6,15,000

Less: Standard Deduction

          50,000

Total Taxable Income

      5,65,000

Total tax

25,500

Cess @ 4%

1,020

Total Tax Payable

          26,520

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’s HRA calculator to find out the HRA component you can claim. 

HRA exemption calculation

Case 1

Case 2

Case 3

A. Rent paid

12,000

12,500

13,000

B. HRA per month

12,500

12,500

12,500

C. 50% of the basic salary*

12,500

12,500

12,500

D. Actual rent paid – 10% of the basic salary

9,500

10,000

10,500

E. HRA exempt portion (Least of the B, C & D)

9,500

10,000

10,500

F. HRA taxable portion per month

3,000

2,500

2,000

 

Revised Taxable Salary

 

 

 

Basic Salary

3,00,000

3,00,000

3,00,000

Taxable HRA

36,000

30,000

24,000

Special Allowance

1,65,000

1,65,000

1,65,000

Total salary

5,01,000

4,95,000

4,89,000

Less: Standard Deduction

50,000

50,000

50,000

Total taxable salary

4,51,000

4,45,000

4,39,000

Total tax

10,050

9,750

9,450

Cess @ 4%

402

390

378

Total Tax Payable

10,452

10,140

9,828

Tax Saved

16,068

16,380

16,692

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.

Taxable Income of Aditya’s father

 

 

With rental income

 

Without rental income  

Interest income

 

3,00,000

3,00,000

Rental income

1,44,000

 

 

Less: Taxes paid

3,000

 

 

Less: 30% deduction

42,300

98,700

Total taxable income

 

3,98,700

3,00,000

Total tax

 

4,935

 

Cess

 

197

Total tax payable

 

5,132

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

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

Frequently Asked Questions

I could not submit receipts on time and have not claimed HRA through my employer?

If you are not able to submit the rent receipts in time to your employer and your employer deducts TDS on HRA, you’re still covered. HRA exemptions can be claimed at the time of filing your income tax return. You can adjust your total taxable salary with the HRA exemption amount while filing your return on ClearTax. Do remember to keep your proofs (rent receipts and rent agreement) safe, in case the assessing officer asks for them later.

Can I pay rent to my spouse and claim deduction on HRA?

Yes, if your spouse is earning and is the sole owner of the house property, then you can claim deduction for the rent paid to them.

My landlord is not ready to share his PAN. What recourse can I take ?

If you want to claim HRA exemption on rent exceeding Rs 100,000 a year then it is mandatory to submit the PAN. Without such PAN you will not be able to claim the HRA exemption.

Is paying rent to parents to claim HRA exemption is legal ?

Yes , You can claim the HRA exemption on rent paid to parents. Ensure that you have proper rental agreement , Periodic payment of rent is done via banking channels.

Can I pay rent to my parents to claim HRA under the new tax regime ?

No , you cannot claim HRA exemption under the new tax regime. It is applicable only in old regime.

What is the limit of rent paid in cash?

There is no limit as such for the rent paid in cash.

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Quick Summary

House Rent Allowance (HRA) allows tax savings. To claim HRA by paying rent to parents, a proper rental agreement and proofs of payment are required. Rental amount must be fair market value. Rent payments must be taxable for parents. To save tax, family can utilize HRA benefits. Exemplified by Aditya's case. Saving could be substantial if parents have lower tax brackets. HRA is only applicable for old tax regime.

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