The new income tax rules propose a change for claiming House Rent Allowance (HRA), which may impact claims where rent is paid to parents, siblings or any other relative. From April 1, salaried people may have to clearly disclose their relationship with their landlord while claiming HRA tax benefits. Sandeep Jhunjhunwala, partner, Nangia Global Advisors, said in a Live Mint report that the aim is to prevent misuse of exemption, especially in cases where rent is shown to be paid to family members to reduce tax liability. If this rule is implemented, tax officials can investigate HRA claims more strictly.
Why is this being done?
HRA can be claimed by salaried people who pay rent for the house in which they live. In cases where a person lives in a house owned by parents or other relatives, it is legally permissible to pay them rent and claim HRA, provided the arrangement is genuine. The relative must be the legal owner of the property, rent must actually be paid, and if the relative’s net income exceeds the exemption limit, the rent received should be taxable in his hands.
But, this rule has often been misused. In some cases, taxpayers claim that they have paid rent to parents or relatives without transferring the money. Sometimes the fare is shown as paid in cash, and HRA is claimed without proper documentation. Although employers usually ask for rent receipts and rental agreements before allowing HRA exemption in salary calculations, they do not always ask for proof of payment. Therefore, fake agreements and fabricated receipts can be used to support false claims.
What does the New Testament say?
The responsibility of detecting such cases mostly lies with the Income Tax (IT) Department. Returns are processed electronically by the Centralized Processing Center (CPC), making it difficult to manually verify the details of each HRA claim. The system may flag large HRA claims for closer scrutiny, but smaller amounts may be ignored. Now, taxpayers will have to declare their relationship with the landlord in their income tax returns, which will make it easier for the department to detect such cases easily. Jhunjhunwala said in the media report that even now, if such rental arrangements are scrutinized closely which are not genuine, they can be rejected. But asking tenants to disclose their relationship with the landlord in the new Form 124 will bring transparency right from the start and prevent fake or inflated rent claims.
How to claim HRA on rent given to relatives
To claim HRA correctly, it is important to follow the correct process and maintain clean financial records.
First of all, you should pay the fare electronically through bank transfer, check or UPI instead of cash. If you use cash, the IT department can verify the payment by looking at your ATM withdrawal history or other evidence of fund transfer.
Second, a valid rent agreement and original rent receipts are required. These documents not only act as proof for the employer but also protect the tenant in case of investigation by tax authorities.
Third, the parent or relative receiving the rent will have to report this income in their tax return. Under the new tax system, if the relative’s net income, including rent, is more than Rs 4 lakh annually, they will have to file a tax return and declare the rent as taxable income. If the rental income exceeds their net annual income by more than Rs 12 lakh, they will have to pay tax on the rent received also.
Extra compliance is required for payment of higher fare. If the monthly rent is more than Rs 50,000, the tenant will have to deduct 2 percent Tax Deducted at Source (TDS) and deposit it in the tax department in March or at the end of the tenancy.
Interest will be charged on depositing TDS
Jhunjhunwala said in the report that for not deducting TDS, 1 percent interest is charged every month, while for not depositing the deducted TDS, 1.5 percent more interest is charged every month. In case of delay in filing e-TDS return, a penalty of Rs 200 is imposed for every day till the return is filed, which is limited to the TDS amount. In 2025, the tax department had sent notices to taxpayers who had large HRA claims but had not paid TDS. Also, last week the department sent notices to high income taxpayers, in which questions were raised on their increased HRA and Leave Travel Allowance claims. After this necessary disclosure, more such notices and penalties are expected for claiming HRA on paper without financial proof or not following TDS rules.