I live in my ancestral home that’s owned by my father. Can I pay him rent to claim HRA tax exemption?

I recently changed jobs and joined an MNC in Hyderabad. My salary includes Rs 40,000 per month as HRA (House Rent Allowance) and Rs. 1 lakh as basic salary. I live with my parents in the ancestral home my father owns. I understand I can make some part of HRA tax-free. Please explain what the rules are.  

Rahul Reddy  

Reply by Rajiv Bajaj, Chairman & MD, BajajCapital Ltd. 

I understand you have been contemplating whether to shift to the new tax regime or continue filing your Income Tax Return under the old regime. It’s essential to weigh each option’s pros and cons before deciding.

Firstly, I want to inform you that if you choose to shift to the new regime, you will not be entitled to any deduction or exemption on your HRA. This means the amount you receive as HRA from your employer will be fully taxable under the new regime.

On the other hand, if you decide to stick with the old regime, you may still not be eligible for HRA relief, as you have mentioned that you are not currently paying any rent. The HRA component of your salary may already be fully taxable, considering you don’t have any rental expenses to claim.

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However, there is a potential way to save some tax if you start paying reasonable rent to your father monthly and submit valid rent receipts to your employer. By doing so, you can avail of HRA benefits even in the old regime.

Here’s how that works: You begin paying your father a reasonable amount as rent, and he issues rent receipts to acknowledge the payments. These receipts act as evidence of your rental expenses. Consequently, you can submit these receipts to your employer to claim the HRA exemption.

It’s important to note that if you choose this approach, the rent you pay to your father will be added to his taxable income. Thus, your father must include this rental income while filing his Income Tax Return. The tax liability on this additional income will depend on his overall taxable income and the applicable tax slabs.

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Before proceeding with this arrangement, I would suggest openly and transparently discussing it with your father. Ensure he understands the implications of including the rental income in his tax return and that it aligns with your financial goals.

In conclusion, deciding whether to shift to the new regime or continue with the old one involves considering various factors, including the impact on HRA deductions/exemptions. If you choose to remain under the old regime and wish to avail of HRA benefits, paying reasonable rent to your father and obtaining proper rent receipts could help you save on taxes. However, it is crucial that you assess the tax implications for both you and your father before finalising any arrangement.

(Views expressed by the investment expert are his/her own)

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