Taxes in 2026: Paying rent to parents to claim HRA is legal; here’s how to save up to Rs 1.2 lakh

Salaried individuals can avail tax relief on House Rent Allowance (HRA) for the financial year 2024–25 (assessment year 2025–26) only if they opt for the old income tax regime while filing their returns. This benefit is not available under the new tax regime, which follows a lower slab structure but does away with most exemptions and deductions.

HRA forms part of an employee’s salary package and is intended to offset rental housing costs. Although HRA is treated as taxable income, the Income Tax Act allows a portion of it to be claimed as exempt under Section 10(13A), subject to prescribed conditions, when the old tax regime is chosen.

Tax advisory platform TaxBuddy explained that claiming HRA by paying rent to parents is fully legal.

Taxpayers can save anywhere between Rs 30,000 and over Rs 1.2 lakh in taxes every year, depending on their income slab.

However, certain rules must be followed and key documents kept ready.

Here’s a quick guide:

Claiming House Rent Allowance (HRA) by paying rent to parents is permitted in India, provided specific tax rules are complied with. It highlights that salaried individuals can potentially save ₹30,000 to over ₹1.2 lakh annually by structuring rent payments correctly and remaining compliant.

To begin with, the property must be owned by the parent, not by the employee claiming HRA. The employee cannot be a co-owner or have their name listed on the property documents; if they do, the HRA claim becomes invalid. The relationship must be clearly established as tenant and landlord, even though it exists within the family.

Proper documentation is mandatory. This includes a written rent agreement between the employee and the parent, rent receipts, and proof that rent is paid through banking channels such as UPI, cheque, or bank transfer. Cash payments should be avoided to ensure audit clarity and traceability.

From the parent’s side, the rental income becomes taxable under the head “Income from House Property.” However, parents are automatically eligible for a 30% standard deduction, and property tax paid can also be claimed as a deduction, often keeping their tax liability relatively low.

A crucial compliance rule relates to PAN disclosure. If annual rent exceeds ₹1 lakh (₹8,334 per month), the parent’s PAN must be submitted to the employer. This effectively links the employee’s HRA claim with the parent’s income tax return.

It is also clarified that HRA exemption is available only under the old tax regime. The new tax regime offers lower slab rates but does not allow HRA exemptions, making this strategy most effective for taxpayers with high rent and other deductions.

 

Recent changes under the new Labour Code may further influence HRA calculations. The code mandates that basic pay should constitute at least 50% of an employee’s total cost to company (CTC). As basic pay rises to meet this requirement, the linked HRA component—typically calculated as a percentage of basic salary—also increases. This, in turn, can raise the quantum of HRA eligible for exemption for many employees, potentially enhancing tax savings for those who continue under the old tax structure.