HRA exemption on rent paid to relative may be prone to scrutiny

I reside in a house owned by my mother and I pay her rent and have been claiming house rent allowance (HRA) for the same for the last seven years. We are now planning to sell this house and buy a new one which will be financed by the proceeds from the sale of the old house and my mother’s other savings, including the rent I pay her. We wish to get my name included as a joint owner in the newly purchased property but I will not be contributing anything financially towards this new property. Can I still continue paying rent to my mother after we move into the new house though I will be a joint owner? Can I still continue claiming HRA exemption on such payment?

—Name withheld on request

At the outset, it should be noted that rental payments to relatives may be prone to scrutiny and the genuineness of the HRA exemption can be questioned.

Generally, if you are employed and are in receipt of HRA from your employer, you can claim an exemption in respect of rental payments made by you against such HRA, under Section 10(13A) of the Income Tax Act. However, the HRA exemption is not available if the house occupied by you is owned by you or you have not actually incurred expenditure on payment of rent towards the house.

From an income tax perspective, mere inclusion of your name in the house agreement may not be the sole conclusive criteria to consider you as the owner of the house. However, keeping in mind the facts of your case (i.e. property belonging to your mother and rent being paid to her, you being the legal owner basis the purchase documents, etc.), the HRA exemption may be challenged.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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