Rent Paid to Spouse or Parents: Will I get HRA Exemption?

Many Salaried persons are in a Dilemma that, will they get House Rent Allowance (HRA) Exemption if they give Rent to their Spouse or Parents. Let’s try to explore the legalities of this via this article.

HRA Paid to Spouse: What Does ITAT Say in this matter?

In the Matter of Abhay Kumar Mittal Vs. DCIT

The assessee has paid house rent and the recipient, the assessee’s wife has declared the same under the head “income from house property” in her returns which has been accepted by the revenue.

The ld. CIT(A)’s contention that the husband cannot pay rent to the wife is devoid of any legal implication supporting any such contention. Hence, keeping in view the entire facts of the case, we hereby allow the appeal of the assessee.

So as per this ITAT ruling, with proper and legitimate Tax planning, it is possible to pay HRA to Spouse.

Here we need to ensure that:

• You can pay rent to your spouse if you are staying in her house.
• The funds for the purchase of a house should belong to the spouse. Like earned from her income or Loan given to her spouse, so as to eliminate the impact of clubbing provisions.
• You should make a rent agreement for the payment of rent.
• Make sure her Income Tax Return (ITR) is being filed and she is showing the rental Income given by you.

What if I am paying rent to my parents?

There is no provision in Income Tax that disallows HRA if rent is paid to Parents. Below are a few points you need to take care of:

• You can pay rent to your parents if you are staying in their house.
• Remember the house should be owned by your parents and you should not be the owner or Co-owner.
• You should make a rent agreement for the payment of rent.
• Make sure you are filing their Income Tax Return (ITR) and showing the rental Income given by you.

Please make sure that the Tax Planning should be Adequate and Documents should be complete. The above-mentioned points are based on observations made by the Income Tax Appellant Tribunal (ITAT) in the matter of Mrs. Meena Vaswani Vs. ACIT

Also refer: Rent Paid to Mother: ITAT disallows HRA based on sham rent payments supported only by rent receipts

How to Calculate Exempt HRA?

According to section 10 (13A) of Income Tax Act, 1961 read with rule 2A of Income Tax Rules, House Rent Exemption will be least of following three:

1. Actual HRA received

2. Rent paid in excess of 10% of salary (Basic + Dearness Allowance + Commission (as % of turnover achieved by the employee))

3. 40% of salary (50% if residing in a metro i.e., New Delhi, Kolkata, Chennai or Mumbai)

Salary for the above purpose means “Basic + Dearness Allowance + Commission (as % of turnover achieved by the employee)”. However, private sector organizations, usually, don’t provide Dearness Allowance to employees.

For Example, suppose your HRA is Rs. 360,000, and your Basic Salary is Rs. 1100,000 and you live in Delhi and are paying monthly rent of Rs. 40000.

• So your Actual HRA received is Rs. 360,000
• Rent paid in excess of 10% of salary (Basic + Dearness Allowance) is Rs. 370,000
• 50% of salary is 550,000

So in this case your complete HRA would be exempt

Know more about HRA Exemption | House Rent Exemption U/S 10(13A)

Use HRA Calculator from Income Tax website to calculate HRA

Do I need to deduct TDS on Rent paid?

In case the monthly rent exceeds Rs. 50000, you need to deduct TDS u/s 194-IB. You do not need to apply for a Tax Deduction Account Number [TAN] for that. The payment of TDS and Return filing would be through a PAN-based System.

Know more about TDS on Rent under section 194IB of Income Tax Act