Claim income tax deduction for rent paid to your parents
Do you live in your parents’ house? You can pay them rent to claim House Rent Allowance exemption.
This is possible only if the property is registered in the name of your parent. The owner will be taxed for the rental income after a 30% deduction. So, if you pay your father a rent of Rs 3,00,000 a year (Rs 25,000 a month), he will be taxed for only Rs 2,10,000 lakh. If your parents are retired and do not derive any significant taxable income, the amount of rent would be tax free in their hands. It is advisable that you enter into an agreement with them and actually make the payment every month, preferably by cheque.
It gets better if the property is jointly owned by both parents. Then you can divide the rent two-ways so that the tax liability gets split between the two parents. If their income exceeds the basic exemption limit, you can help them save tax by investing in their name under Section 80C options such as the Senior Citizens’ Saving Scheme, five-year bank fixed deposits or tax-saving equity mutual funds.
However, this tax-free window will become smaller next year after the proposed Direct Taxes Code (DTC) comes into effect. The DTC has proposed to bring down the 30% standard deduction on rental income to 20%. This would push up the tax liability of the senior citizens who receive rent from property. Also, many of the existing tax saving options will no longer be available under the DTC regime.
Take a look at the example to see the tax implications. Let us assume your monthly basic salary is Rs 40,000 and HRA is Rs 16,000. Your monthly rent is also Rs 16,000. In this case, of the total monthly HRA, Rs 12,000 will be tax exempt. Assuming you are in the 20% tax bracket, your annual tax saving would be Rs 29,664.
Please note that you will have to submit copies of rent receipts or rent agreement, depending on what your organisation stipulates.
Remember, the same is not possible if you are paying rent to your spouse even if your spouse is issuing rent receipts. The reason behind this rule is that there cannot be a commercial relationship between spouses as they are believed to be staying together.