‘Legal Trick’ to save tax through HRA: Get tax exemption without paying rent! Check Details

Now let’s come to that specific situation. Suppose you are employed, you get HRA, but you live in your parents’ or a close relative’s house instead of paying rent to an outside landlord. Can you still claim HRA? The answer is – yes! The Income Tax Act allows you to do so, but with some important conditions:

1. Home ownership

The first and most important condition is that the house in which you are living should not be in your name. That house should be registered in the name of your parents or the relative to whom you are paying rent.

2. Actual rent paid

You really have to pay rent to your parents or relatives every month. It should not be just a paperwork. It is better to pay rent through bank transfer so that you have solid proof of it.

3. Rent agreement and receipts

Get a formal rent agreement made, which mentions the rent amount and other terms. After paying the rent every month, take a rent receipt from your parents/relatives. These documents may have to be shown as proof to the Income Tax Department.

Tax aspects for parents

Here is another important thing. The rent you pay to your parents or relatives will be considered as their ‘income from house property’. They will have to show this rental income in their Income Tax Return (ITR). They may also have to pay tax on this income as per the applicable tax slab.

However, there is an advantage to this. If your parents are senior citizens and do not have much taxable income, then this rent can become a source of income for them and they may not have to pay any tax on it due to the basic exemption limit. This way, you can avail the HRA exemption and also help them a little financially.

How much HRA amount will be exempted? (Calculation)

How much of your HRA will be tax free depends on three conditions. The amount which is the lowest among these three will be tax exempt.
1. Actual HRA received: How much HRA does your company give you annually.
2. Total rent paid minus 10% of your salary: (rent you paid annually – 10% of your salary).
3. 50% of salary for metro cities / 40% for non-metro cities: 50% of your salary if you live in Delhi, Mumbai, Kolkata or Chennai, 40% of your salary for other cities.
Here ‘salary’ means – your basic salary + Dearness Allowance, if it is a part of retirement benefits.

Example: Suppose your Basic+DA = ₹50,000/month (₹6 lakhs/year), you get HRA ₹20,000/month (₹2.4 lakhs/year), you live in Delhi and pay rent to parents ₹15,000/month (₹1.8 lakhs/year).
HRA received = ₹2,40,000
Rent – 10% Salary = ₹1,80,000 – (10% of ₹6,00,000) = ₹1,80,000 – ₹60,000 = ₹1,20,000
50% Salary = 50% of ₹6,00,000 = ₹3,00,000
Out of these three (₹2.4 lakh, ₹1.2 lakh, ₹3 lakh), the lowest is ₹1,20,000. So, you will get tax exemption on HRA of ₹1.2 lakh annually.

Living in your parents’ or relative’s house and paying them rent is a legitimate way to claim tax exemption on HRA. But for this, it is very important to have legal documentation (rent agreement, rent receipt, bank transfer proof) and follow the rules. Also, the person receiving the rent (parents/relatives) will also have to take care of their tax liability. If you have any doubts, it is always better to consult a tax advisor.