‘Can I just show rent paid to parents and claim HRA?’: Why this tax hack can attract I-T notice

During income tax return (ITR) season, many salaried individuals look for smart ways to save on taxes. One common "hack" that often resurfaces is claiming House Rent Allowance (HRA) by showing rent paid to parents. While technically legal, tax experts are warning that unless done properly, this tactic can backfire. CA Apoorva Gavai recently shared a real-life client story: “She was excited, telling me she’d figured out how to save tax — by claiming HRA for rent paid to her parents. But when I asked if she was actually transferring money to them, she said no. That’s where the problem lies.”

Indeed, while the Income Tax Act allows you to claim HRA for rent paid to parents, it must be a genuine, documented transaction. With the Income Tax Department deploying AI and data matching tools, it has become easier for them to detect fraudulent or suspicious claims.

Here’s what you must do to legally claim HRA when renting from parents:

Transfer rent regularly via bank transaction

Draft a formal rent agreement

Ensure your parents declare the rental income in their ITR

Failure to do any of the above could not only lead to the rejection of your HRA claim but may also attract a tax notice or penalty.

“Verbal understandings or back-calculated rent payments won’t stand up to scrutiny,” says Gavai. “With the government’s systems more connected than ever, jugaad won’t cut it anymore.”

I-T lens

In recent years, the Income Tax Department has tightened oversight over salaried individuals filing returns with refund claims based on deductions not supported by documentation. Many employees skip declaring investments or rent payments to employers but later try to claim those deductions while filing their returns, often without any valid proof.

HRA exemption rules for FY 2024-25 (AY2025-26)

Salaried employees opting for the old tax regime can still claim HRA exemption. However, this is not allowed under the new tax regime. On the ITR portal, taxpayers claiming HRA must now furnish more detailed disclosures, including:

Place of work

Actual HRA received

Rent paid

Basic salary and DA

If these details were submitted to employers earlier in the year, they may be pre-filled on the ITR portal. Otherwise, individuals must enter them manually.

PAN requirement for landlords

If your annual rent exceeds Rs 1 lakh, you must submit your landlord’s PAN to your employer. If the landlord doesn’t have one, a declaration with their name and address is required.

How is the HRA exemption calculated?

Under the old regime, the least of the following is exempt:

Actual HRA received

50% of salary (for metro cities) or 40% for non-metros

Rent paid minus 10% of salary

Taxpayers can use an HRA calculator to determine how much they can claim.

Bottom line: Know the rules before you claim deductions. HRA can be a powerful tool to save tax, but only if done the right way. Gaming the system may lead to more pain than gain.