It is common for taxpayers to claim HRA exemption by paying rent to parents. But a lot of us do not know the right way to do this. Let’s understand in detail.
You may have heard about a recent case law of how the income tax department refused to allow HRA exemption for rent paid by a married daughter to her mother.
Here are some details of the case law –
- The taxpayer claimed she lived with her mother, since her mother was an old and sick lady.
- She paid rent in cash to her mother of Rs 31,500 per month.
- She claimed she paid rent to live with her mother, so that her siblings did not object.
- She did not enter into a rent agreement, however she had rent receipts of payments made to the mother.
- The taxpayer had also claimed interest on home loan in her tax return. And also claimed deduction for principal repayment under section 80C. This house was jointly owned with her husband and was claimed as self-occupied.
- The Assessing Officer rejected the claim of the taxpayer w.r.t HRA. He held that the taxpayer must prove that she hired an accommodation and used it and paid the rent.
- The AO visited the premises of the mother.
- Her mother was living in a one bedroom apartment with one of her daughter, who was unmarried.
- The claim of the taxpayer that payment of rent was a family affair and no leave and license agreement was entered was rejected by the AO. As it was observed by the AO that if the rent is paid, the relation between the parties was a contractual relation, even if it is between family members it needs to be supported by documentary evidence. It was observed by the AO that if the rent was paid by the taxpayer to help her to help her mother who was old and sick to meet her day to day living cost, this does not entitle her to claim exemption of HRA under section 10(13A) of the income tax act.
Are you claiming HRA exemption for rent payments made to parents?
Here are the some important things to follow-
- Rent agreement – Make sure there is a signed agreement between you and your parents. This agreement should mention the premises which is rented out by you. If you are making a lump sum payment, including for electricity, water and others, make sure this fact is stated in the agreement itself. This taxpayer did not enter into a rent agreement with her mother.
- Actually make payments – Make payments by transferring money to your parents account, monthly or at regular intervals as per the terms of the agreement. The taxpayer in the above case made payments in cash. And could not satisfy the AO whether this included payments towards rent and other amenities used by her at her mother’s place.
- Physically reside in rented house – Goes without saying! 🙂 This fact was a straight giveaway in the above case. The taxpayer was married and owned a self-occupied house property jointly with her husband. They also had a daughter. The AO found it hard to believe an arrangement where the daughter lived with her mother in a 1 bedroom apartment along with an unmarried sister.
- Parents must include rental income in their tax return – Make sure your parents have included this rent in the tax return they will file. Here the mother did not report rental income in her tax return.
Should you mention the address of the rented premises in your income tax return?
An economic times article here reports that the AO can check whether the address mentioned in the ITR is the same as property on which rent is paid. However, the instructions of filing income tax return forms ask for a ‘communication address’. This communication address may be an address different from your physical address. There are no specific instructions in the tax return forms that require you to mention the address of the rented accommodation for which HRA is being claimed.
Unsure about whether you are claiming HRA the right way? Write to us email@example.com and we will help you out.