Pay rent to your parents and save tax
House Rent Allowance (HRA) is offered to almost every salaried employee. Taxpayers who have been living with their parents too can capitalise on the benefits under the Income Tax Act that allows tax deductions on house rent.
You can pay rent to your parents by transferring money to their bank account or pay via a cheque. This way you will be able to claim your HRA deduction properly.
According to the Income Tax law, house rent is to be paid to the owner of the property. Hence, in order to claim tax benefits on rent agreement, the housing property should be owned by the parents. Remember that you cannot be an owner or co-owner of this property since you cannot claim tax exemption on rent paid to yourself.
Rent agreement and rent receipts
Usually employers ask for a copy of the rental agreement for their records. They can also request for rent receipts to allow you HRA exemption. You can enter into a simple rent agreement with your parents.
Rental income is taxable for parents
However, the rent that is paid to the parents is in turn taxable for them under the ‘income from house property.’ They can claim property taxes paid by them and also claim a 30% standard deduction from this rental income.
By submitting rent receipts and paying it, you will be able to claim exemption on HRA. If your parents are in a lower tax bracket than you, the family can save tax as a whole. If they are more than 60 years old, they will also enjoy a higher minimum income exemption limit (Rs.3 lakh for those who are aged above 60 years old and Rs.5 lakh for those who are aged above 80 years old). In case they do not have any taxable income, you will be able to save significant tax as a family.
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