HRA or house rent allowance is the most common allowance received by the salaried. Those who live on rent can maximize on saving tax through HRA.
Very soon it will be time for employers to start collecting tax-saving declaration for the financial year.
Are you unsure about how to claim HRA if you live with your parents?
Those who live with parents, can pay rent to their parents and save tax on HRA.
Let’s find out how-
1. How to claim HRA by paying rent to your parents?
2. Understand how to save tax by paying rent to parents with an example.
3. Points to remember to claim HRA by paying rent to parents
Ownership of the house –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. Remember that you cannot be an owner or co-owner of this property since you cannot claim tax exemption on rent paid to yourself.
Paying rent –You can pay rent to your parents by transferring money to their bank account or pay via a cheque. This way you will be able to claim your HRA deduction properly.
Rent agreement and rent receipts – Usually employers ask for a copy of
the rental agreement for their records. They can also request for 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 – see
here. You can print these receipts and submit 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 ask for them.
Rental income is taxable for parents – Rent paid by you to your parents shall be taxable for them. They will include this income under the head ‘income from house property’ in their tax return. They can claim property taxes paid by them and also claim a 30% standard deduction from this rental income.
Save tax as a family – By submitting rent receipts and paying it, you will be able to claim exemption on HRA. Your parents can deduct property taxes and also claim 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 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.
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 2018-19 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.
This is the detail of salary earned by him.
| Basic Salary |
3,00,000 |
| HRA |
1,50,000 |
| Special Allowance |
1,65,000 |
| Total |
6,15,000 |
| Less : Standard Deduction |
40,000 |
| Total Taxable Income |
5,75,000 |
| Total tax |
27,500 |
| Cess @ 4% |
1,100 |
| Total Tax Payable |
28,600 |
Now, using ClearTax’s
HRA calculator, let’s find out how much HRA will be exempt if Aditya decides to pay rent to his parents.
| 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 |
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 |
40,000 |
40,000 |
40,000 |
| Total taxable salary |
461,000 |
455,000 |
449,000 |
| Total tax |
10,500 |
10,250 |
9,950 |
| cess @ 4% |
422 |
410 |
398 |
| Total Tax Payable |
10,972 |
10,660 |
10,348 |
| Tax Saved |
17,628 |
17,940 |
18,252 |
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
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.
