Benefits of Claiming HRA – House Rent Allowance

Under section 10-13A of the Income Tax Act, the component of salary received towards the rent payment is allowed as deduction from taxable salary. In fact, tax benefits can be maximized by claiming an HRA deduction from the salary. 

Let’s study a case where a person pays rent to his/her parents. How and under what circumstances HRA can be claimed when you live with your parents?

Suppose Mr. X lives with his father, who is a single parent. Mr. X is paying monthly rent to his father and is claiming HRA deduction from his salary for the past many years. Eventually the father sold the current house and bought a new one out of the proceeds of the old house. Though Mr. X is not going to contribute anything towards it, his name is there as a joint owner to avoid legal issues in case of death of his father. 

Mr. X still pays rent like he used to do before via online banking. He claims HRA by providing his father’s PAN to his employer. He renews the rental agreement, and the father also shows the rental income in his Income Tax Return. Could he claim HRA deductions based on the above facts?

A point wise explanation is given here,

  • Rent can be paid by an individual to a parent/parents while staying with them.
  • When HRA is allowed by the employer, it can be claimed. If an individual is a self-employed person, or HRA is not allowed by the employer, then no such claim can be made. 
  • To claim HRA deduction, the amount of rent should be transferred to the parent’s bank account or via a cheque. 
  • The property must be occupied by the person claiming the HRA benefit. 
  • The property must be owned by either one or both of the parents. If it is merely occupied by the parents but not owned, then the HRA benefits cannot be claimed. 
  • In case of joint ownership, the rent should be paid to the parent who is the legal owner of the property.
  • The person making the payment, in the above example, Mr. X cannot be an owner or co-owner of the property as no tax exemption can be claimed on rent paid to yourself.
  • A simple rent agreement can be entered into with the parents.
  • Rent receipts must be maintained to claim HRA exemption and also as proper records, in case the assessing officer asks for them. 
  • Most importantly inclusion of the name of Mr. X as a joint owner is for the sake of avoiding legal complications after his father’s death. The father remains the full owner and Mr. X just being a beneficial one. It doesn’t prevent him from claiming the HRA benefits. 

Thus, in the light of all the above-mentioned grounds, Mr. X can claim the HRA exemption from his income.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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