The new Income Tax rules have proposed a change for claiming house rent allowance (HRA) that may affect claims where the rent is paid to parents, siblings or any other relative. Effective 1 April, salaried employees may have to clearly state their relationship with their landlord while claiming HRA tax benefits.
The aim is to prevent misuse of the exemption, especially in cases where rent is shown to be paid to family members to reduce tax liability, said Sandeepp Jhunjhunwala, partner at Nangia Global Advisors. If implemented, the rule could lead to stricter checks of HRA claims by tax authorities.
Why is this being done?
HRA can be claimed by salaried individuals who pay rent for the house they live in. In cases where a person lives in a house owned by parents or other relatives, it is legally permissible to pay rent to them and claim HRA, provided the arrangement is genuine. The relative must be the legal owner of the property, rent should actually be paid, and the rent received by the relative is taxable in their hands if their net income is above the exemption limit.
However, this provision has often been misused. In some cases, taxpayers claim to have paid rent to parents or relatives without actually transferring the money. Rent is sometimes shown as paid in cash, and HRA is claimed without proper documentation. While employers typically require rent receipts and a rental agreement before allowing HRA exemption in salary calculations, they don’t always demand proof of payment. Fake agreements and fabricated receipts can therefore be used to support false claims.
The responsibility of detecting such cases largely rests with the income tax (I-T) department. Returns are processed electronically by the centralised processing centre (CPC), which makes it difficult to manually scrutinise every HRA claim in detail. The system may flag unusually high HRA claims for closer examination, but smaller amounts can escape attention.
Now, taxpayers will be required to disclose their relationship with the landlord in Form 124, making it easy for the department to detect such cases easily. Form 124 is a self-declaration form which employees provide employers at the start of the fiscal year for calculating payroll taxes to be deducted at source during the year.
“Even now, rent arrangements that are not genuine can be rejected if examined closely. But asking tenants to disclose their relationship with the landlord in the new Form 124 could discourage fake or inflated rent claims by adding transparency right from the start,” said Jhunjhunwala.
How to claim HRA on rent paid to relatives
To claim HRA correctly, it is essential to follow proper procedures and maintain clear financial records.
- First, you should pay rent electronically through bank transfer, cheque or UPI, rather than in cash. If you use cash, the IT department may verify payments by checking your ATM withdrawal history or other evidence of fund transfers.
- Second, a valid rent agreement and genuine rent receipts are mandatory. These documents not only serve as proof for employers but also protect the tenant in case of scrutiny by tax authorities.
- Third, the parent or relative receiving the rent must report this income in their tax return. Under the new tax regime, if the relative’s net income, including rent received, exceeds ₹4 lakh annually, they must file a tax return and declare the rent as taxable income. If the rental income pushes their net annual income above ₹12 lakh, they will also need to pay tax on the rent received.
Larger rental payments require additional compliance. If monthly rent exceeds ₹50,000, the tenant must cut 2% as tax deducted at source (TDS) in March or at the end of the tenancy and deposit it with the tax department.
“Non-deduction of TDS attracts interest at 1% per month, while failing to deposit deducted TDS carries a higher interest of 1.5% per month. Delays in filing e-TDS returns lead to a penalty of ₹200 per day until the return is filed, capped at the TDS amount itself,” Jhunjhunwala said.
In 2025, the tax department had sent notices to taxpayers who had large HRA claims but hadn't paid TDS. Also, last week the department sent notices to taxpayers in high income brackets, questioning their inflated HRA and leave travel allowance claims. With this mandatory disclosure introduced, claiming HRA on paper without financial proof or failing to follow the TDS rules is expected to trigger more such notices and penalties.