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

Very soon employers will start collecting tax saving declaration for the financial year.

Are you worried about how to claim HRA if you live with your parents?

Those who live with parents, can pay them rent and save tax on HRA.

Let’s find out –

How to claim HRA by paying rent to parents?

Understand how to save tax by paying rent to parents with an example.

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 must pay rent to them. You can do this by transferring rent to their bank account or pay via cheque. This way you will be able to support your HRA claim properly.

Rent agreement and rent receipts – Usually employers ask for a copy of rent 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. Or you can download them and save them in 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 30% standard deduction from this rental income.

Save tax as a family – By submitting rent receipts and paying rent, you will be able to claim exemption on HRA. Your parents can deduct property taxes and also claim 30% standard deduction on 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 3lakhs for more than 60 years old and Rs 5 lakhs for more than 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 years old Aditya lived in Dwarka, New Delhi with his parents. His office was in Gurgaon and he used to commute daily to his office from Dwarka. Aditya had recently started working, and his employer asked for tax saving declarations for FY 2016-17 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. 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        1,25,000
Total        5,75,000
Total tax
0-2.5L                    –
2.5lakhs to 5lakhs           25,000
5lakhs to 5.75lakhs           15,000
total tax           40,000
cess              1,200
total tax + cess            41,200

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
HRA per month           12,500           12,500           12,500
Rent paid           12,000           12,500           13,000
HRA exempt portion              9,500           10,000           10,500
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        1,25,000        1,25,000        1,25,000
Total taxable salary        4,61,000        4,55,000       4,49,000
Total tax
0-2.5L 0 0 0
2.5lakhs to 5lakhs 21,100           20,500           19,900
5lakhs to 5.75lakhs
total tax             21,100           20,500           19,900
rebate under section 87A              5,000             5,000             5,000
cess                 483                465                447
total tax + cess             16,583            15,965            15,347
Tax Saved 24,617              25,235              25,853

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 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 interest income of Rs 3,00,000. His father is 65years old.

Let’s find out 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                   1,01,700                                     –
Total taxable income                   4,01,700                         3,00,000
Tax
0-3L                               –                                     –
3L-5L                      10,170                                     –
Rebate under section 87A                        5,000
Cess                            155                                     –
total tax + cess                         5,325                                     –

Total tax saved as a family = Rs 24,617 less Rs 5,325 = Rs 19,292

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

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

 

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