The Income Tax Act, 1961, allows individuals to save income on house rent allowance (HRA) received as a part of their salary provided they have lived in a rented accommodation and paid rent in the financial year concerned. However, many salaried individuals use the HRA tax exemption to save income tax by paying rent to their wife, parent or other relatives.
To be clear, a salaried individual can consider a relative, parent or wife as landlord, pay rent to the person concerned and save income tax. However, the Income Tax tribunal has issued various judgments rejecting such HRA tax exemptions, leading to the individual having to face higher tax liability. Recently, as per The Times of India report, the income tax department unearthed the HRA fraud with illegal usage of PANs. As per the report, at least 8000-10,000 high value cases have been detected with amounts running to Rs 10 lakh or more.
ET Wealth Online spoke to lawyers and tax experts on what the Income Tax Act says if an individual claims HRA tax exemption on rent paid to a relative, parent or wife?
Abhishek Soni, CEO, Tax2Win.in – an ITR filing website: “An individual can claim HRA exemption by paying rent to parents or relatives subject to certain conditions. These include: an individual should have a valid rental agreement, the rent amount should be transferred through banking channels, property should be owned by the person to whom the rent is paid. The person receiving the rent must show it as rental income in the income tax return (ITR). Thus, genuine rent payments to parents or relatives are eligible for tax benefits subject to the basic conditions provided in the income tax law. However, rent paid to the wife is subject to litigation as there are a few cases where this has been restricted. Contrast to this, the Delhi Income Tax Appellate Tribunal recently allowed the HRA tax benefit for rent paid to wife. This depends on the facts of the case and genuineness of the transaction.”
Also Read: Claiming HRA tax exemption? Here is how your rent agreement should look like
Also Read: All you need to know about HRA tax exemption rules
S. Vasudevan, Executive Partner, Lakshmikumaran & Sridharan Attorneys: “Legally, there is no bar on claiming HRA exemption by a taxpayer for rental payments made to relatives. However, the relationship between the parties may give rise to suspicion to the assessing officer regarding genuineness of the HRA exemption. Thus, taxpayers have to maintain robust documents to prove the genuineness of the HRA exemption claimed by them. The taxpayers may have to specifically prove that the property was actually occupied by them, rental amount is reasonable and commensurate with prevailing market rates, rental payments were actually made to the relative (preferably through banking channels) and the rental income was declared by the relative in his ITR (wherever applicable). Further, in case the rentals are paid to wife, there is an additional onus to prove her financial independence for acquiring the rented property, failing which the assessing officer might reject the HRA exemption.”
Naveen Wadhwa, DGM, Advisory & Research, Taxmann: “HRA deduction can be claimed when rent is paid to family members, including wife and parents, provided the recipient of rent shows it as an income and declares it in the income tax return. If a house is in the name of a family member and the employee uses the house for his own residence, any rent paid to the family member shall be eligible to the benefit of HRA tax exemption. It should be noted that HRA deductions can be claimed if rent is actually paid to the family member. The tax department can ask for evidence of actual payment made to the family members, i.e., bank statement, electricity bill, etc. The assessing officer can also ask for a copy of the income tax return of the family member to check if they have shown such rent in their respective income tax return forms.”
