Not many people are aware that if they are staying in their parents house then they can pay rent to their parents and save tax. I briefly covered this point in my post Tax Benefits on HRA – House Rent Allowance. Its a comprehensive topic as it involve lot of ifs and buts. As it help to save tax, it doesn’t mean we can blindly follow this rule related to HRA. It require financial impact study i.e. whether paying rent to parents will actually help to save tax or not on net basis. Sometimes due to ignorance of finance team of employer, HRA exemption is rejected specially in case rent is paid to parents. Employee gets frustrated as it increases tax outflow towards the end of FY. In my opinion, the two major concerns of any salaried employee is Performance at work place and how to Save Tax. Recently i received many queries regarding how to claim HRA exemption and save tax by paying rent to parents. I thought of writing separate post on this topic. We will discuss all such queries and issues faced by the employee.
One of my client Sunil Kadam is staying in his parents house along with his family in Vashi, Navi Mumbai. His office is in Bandra Kurla Complex, Mumbai. He claimed HRA deduction u/s 10(13A) but finance department rejected HRA exemption. He approached me how he can save tax else his employer will deduct tax on HRA exemption claimed from April’14 to Jan’15 in Feb’15 and Mar’15 salary. When i checked the details i observed that Sunil was paying rent to his mother whereas property was registered in the name of his father. The finance department was right in rejecting the HRA exemption. I suggested him to invest in PPF and ELSS to save tax as this issue cannot be addressed for current FY.
As next FY is approaching therefore it is important to take care of following points if you wish to save tax by paying rent to your parents & claim HRA exemption.
Save Tax – Points to consider while paying rent to parents
(a) Property should be in Parent/s name: Now it is imp to note that you can save tax only if you are paying rent to parent/s who is owner of the property. If the property is jointly held by your father and mother then you should pay rent to both of them. Please note that this rule is only for parents. Rent paid to spouse does not qualify for HRA exemption. Reason being, as per income tax department you are suppose to stay with your spouse. In short, you cannot save tax if you are paying rent to your spouse. Needless to say, if you are saying in own house i.e. self occupied then you cannot claim HRA exemption. Another common query is that person has own house in same city whereas he is staying in his parents house. In this case, he claim HRA by paying rent to his parents and declare his own house as let out property.
(b) Rental Income is taxable: Another very common misconception. If your mother is working and you are paying rent to her in order to save tax. This rental income is taxable in her hands. She has to include it in her income and pay tax accordingly. She can claim 30% of the annual rent as deduction for maintenance expense like repairs etc. Now you must be wondering how this arrangement help to save tax. As i explained initially that this arrangement is not beneficial always. In following points i will discuss under what conditions it is financially beneficial.
(c) Income Tax Slab of parents: If your parents are retired and they do not have any other source of income then you can save tax on net basis. In short, as a family you can save tax. In another scenario, if you are in 30% tax bracket but your working parents are in 10% income tax bracket then also it is beneficial on net basis. From family perspective, tax on rental value will be 10% instead of 30% thus you will save tax to the extent of 20% on rental value. Best possible scenario is when parents house is in joint name or they don’t have any other income source. In this case, income will be exempted till basic limit. The best part is you can decide how much rent you will pay to your parents provided rent is justified. It will help to save tax till optimum point.
(d) Documentation: In order to avoid rejection of HRA exemption by your employer, it is important to complete documentation related to HRA to save tax. You should sign rental / leave and license agreement with your parents if rent paid per month is more than Rs 8,333/=. You should pay rent through cheque and don’t forget to take rent receipts for rent paid. It will make HRA exemption fool proof. You may submit all documents with your employer to claim HRA exemption.
(e) Distance between work place and Parents House: I received many queries wherein employee is staying in temporary accommodation in Metro city (Work Place) during weekdays & Parents are staying 100 – 150 kms away. An employee is paying rent to parents as his family is staying with the parents in his home town. Lets take case of Mr. Raju, he is working in Delhi and his family is staying with his parents in Karnal (Haryana) which is approx 130 Kms from delhi. He cannot travel on daily basis from Karnal to Delhi. He asked me whether he can claim HRA or not as he is paying rent to his parents. Now to be very honest, it is very subjective whether HRA can be claimed or not to save tax. Only suggestion from my side is that if you can prove that it is possible to travel daily from parents house to work place then you can claim HRA exemption on rent paid to parents. In my opinion, distance of upto 100 Kms is justifiable but you cannot justify distance of 150 – 200 Kms. When you are claiming HRA exemption it is assumed that you are also staying at same place. It is peculiar situation but to save tax, you should have valid justification.
Remember that you should save tax only through logical and transparent way. Any discrepancy in tax details may invite heavy penalty from income tax department. It is always advisable to consult tax consultant before claiming any tax exemption.
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