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Photo: iStock
Photo: iStock

Rental payments to relatives are prone to being scrutinized by tax authorities

  • You can claim deduction against rent paid, even if you don’t receive HRA
  • HRA exemption is not available if the house occupied by you is owned by you or you have not actually incurred any expenditure on the payment of rent towards a house

I live in a flat in Pune that my parents own. My parents live in Hyderabad. Can I claim house rent allowance (HRA) exemption if I were to pay rent to them? What would be the appropriate way to go about this process?

—Mani

At the outset, it should be noted that rental payments to relatives may be prone to being scrutinized by the income tax authorities to establish the genuineness of the HRA exemption.

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, 1961. However, the HRA exemption is not available if the house occupied by you is owned by you or you have not actually incurred any expenditure on the payment of rent towards a house.

In your case, if you make bona fide rental payments to your parents, you may be eligible to claim HRA exemption, subject to limits prescribed under the Act. You should maintain robust documentation (for instance, rent agreement, rent receipts and bank statements, confirming the payment of rent and other documents which are generally present in a rental arrangement with a third party) in support of the claim. Also, where the monthly rental payments exceed prescribed limits, you may be required to undertake the prescribed withholding compliances on the payment of rent.

Interest on NHAI Capital Gain Exemption Bonds (Section 54EC bonds) is paid on 1 April every year and is taxable. I invested in these bonds in August 2019 and will receive my first interest payout on 1 April 2020, and thereon on 1 April every year. Should I declare this interest in my tax returns on an accrual basis in financial year (FY) 2019-20 or can I declare it on receipt or cash basis in FY21? Or can I choose between cash/receipt basis and accrual basis, and follow the same rule every year?

—A. Venkat

Income chargeable to tax under the head “income from other sources" (such as interest and dividend) is to be computed according to the method of accounting (that is, on a mercantile or cash basis) regularly employed by the taxpayer.

Accordingly, in case you have historically been offering interest income or income from other sources based on accrual/receipt basis, you could take the same approach for interest income from NHAI bonds as well.

It should also be noted that a few judicial precedents in this context have also held that the term “regular" does not mean “permanent", so the provision cannot be interpreted to mean that once the system of accounting is adopted, it cannot be changed. Therefore, the exact facts of your case may need to be verified.

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

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