Can I pay rent to my parents to save tax?

HRA or house rent allowance is the most common allowance received by the salaried. Those who live on rent can maximize 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.

Let’s find out how.

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 pay 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.
• 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 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 – see here. 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 ask 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.

Benefits of claiming HRA while staying with family

• 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.

Illustration on how to claim 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 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	4,61,000	4,55,000	4,49,000
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

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.

Related Articles

HRA – House Rent Allowance – Exemption Rules & Tax Deductions
5 things you must know about the most common allowance – HRA
HRA calculator