For Salaries persons, House Rent allowance (exemption under section 10 (13A) of the income tax Act) is a very important deduction allowed while calculating the taxable Salary on which income tax has to be deducted. However when one is staying with one’s parents, how does one take advantage of the above?
Income Tax Act does not prohibit payment of rent to one’s parents. You can pay the rent to them to claim HRA. To avoid any income tax issues, deal with the same as you would deal with a third party landlord. So, to avoid any tax issues, do the following:
- Execute a registered lease deed with reasonable market rent. (This does not cost much but is very very useful)
- Actual payment of rent by cheque/ bank transfer. Don’t just show but actually pay it.
- Above lease agreement and payment of rent should only be towards those who own the house. If your mother is shown as the owner of the house in house records, you can pay rent to her. Just don’t select any one parent as owner because he or she does not have taxable income. Rent has to be paid to the person who owns the house and not as per your convenience.
- Ensure that the rental income is reflected in your parents income tax returns. Even if there income is below the taxable limit, do ensure to file their return with the rental income.
Now, about quantum of rent, it is my opinion, that since this is a related party transaction, take a conservative view and pay rent slightly below the market rentals; maybe around 15–20% lower.