Claiming HRA on rent paid to parents and relatives will be harder from 1 April

The new Income Tax rules have proposed a change for claiming house rent allowance (HRA) that may affect claims where the rent is paid to parents, siblings or any other relative. Effective 1 April, salaried employees may have to clearly state their relationship with their landlord while claiming HRA tax benefits.The aim is to prevent misuse of the exemption, especially in cases where rent is shown to be paid to family members to reduce tax liability, said Sandeepp Jhunjhunwala, partner at Nangia Global Advisors.

If implemented, the rule could lead to stricter checks of HRA claims by tax authorities.HRA can be claimed by salaried individuals who pay rent for the house they live in. In cases where a person lives in a house owned by parents or other relatives, it is legally permissible to pay rent to them and claim HRA, provided the arrangement is genuine.

The relative must be the legal owner of the property, rent should actually be paid, and the rent received by the relative is taxable in their hands if their net income is above the exemption limit.However, this provision has often been misused. In some cases, taxpayers claim to have paid rent to parents or relatives without actually transferring the money.

Rent is sometimes shown as paid in cash, and HRA is claimed without proper documentation. While employers typically require rent receipts and a rental agreement before allowing HRA exemption in salary calculations, they don’t always demand proof of payment.

Fake agreements and fabricated receipts can therefore be used to support false claims.The responsibility of detecting such cases largely rests with the income tax (I-T) department. Returns are processed electronically by the centralised processing centre (CPC), which