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Home»Columns»Tax Planning: Pay rent to Parents or Spouse and claim HRA Exemption under Income Tax Act. Know-How

Tax Planning: Pay rent to Parents or Spouse and claim HRA Exemption under Income Tax Act. Know-How

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By Akshay Sharma on April 27, 2022 Columns, Current News, Taxation News, Top Stories
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In India, there are a lot of young couples who are starting their own families. And as the couples start their own families, one of the key decisions that they need to make is who will be paying the rent. There are two options available to couples when it comes to paying rent – either the husband pays the rent and the wife claims HRA exemption or wife pays rent and husband claims HRA exemption. Actually there is a lot of confusion around the concept of HRA exemption for rent paid. Let’s try to clear some of that up. First, you can only get the HRA exemption if your employer offers it to you. And second, you can only claim the exemption if you are paying rent to your parents or spouse. If you are living in their house and they are not charging you rent, then you cannot claim the HRA exemption.

Now the question that has kept many of us in confusion is that can we claim HRA by paying rent to parents or spouses. There are many people in India who are either paying rent to their parents or spouse in order to save on income tax. This is a perfectly legal way of saving on one’s income tax and can be done by filing the right forms with the Income Tax Department.

So if you are thinking about Whether Paying Rent to Parents or Spouses to be considered a Tax Evasion Method? Let’s first understand as what are the major conditions that you should follow before claiming HRA. According to Section 10 (13A) of the Income Tax Act, the rented premises shall not be owned by the person claiming the tax exemption. But that is so then can the rent paid to the spouse or relatives be eligible for a Housing Rent Allowances (HRA) exception? And what If the house/flat is not under the name of the person claiming the tax exemption, shouldn’t one be allowed to claim an HRA exemption in this situation? Also, If the rent is paid to the spouse where the premises is under the spouse’s name, can I claim tax under such circumstances?

To answer all of your tricky questions, you have to understand that as per the Income Tax Act, a person over the age of 18 is considered independent of their parents and a separate taxpayer. In view of the above, any rent that that person to his/her parents or spouse will be considered for HRA exemption if there is a suitable tenancy agreement, the rent is filed as an income by the parents or spouse and is taxable under Income from housing property. From real estate, rent payable by check or wire transfer upon valid receipt, the property is in the name of parents or spouse (Where property is not a co-owner of the claimant). This deduction cannot be claimed if the residences are rented.

Sometimes when basic elements of a commercial arrangement are missing when rent is paid to a spouse and such efforts can be seen as an attempt to avoid taxes. A married couple is considered to be living together or in a shared space, and any payments made by one to the other for the use of a common space are not considered rent. Normally, any housing income is split between both couples, and an exemption cannot be claimed for clubhouse income paid by the other. Such an agreement between the spouses is considered contrived and inconsistent with the spirit of the law. This has been upheld by various courts in the past. It is good practice to avoid agreements made solely for the purpose of tax evasion. Though, if we go by law then neither the Income Tax Rules 1962 nor the Income Tax Act 1961 prohibit the eligibility of HRA deduction claim on the rent paid to the spouse. Only if the property is owned or co-owned by the taxpayer then does the rule prohibit such exemption. A taxpayer can be entitled to such an exception if there is genuine documentation to prove an honest rent payment transaction such as a legal rent agreement, timely payment of rent with receipts, the spouse’s complete legal ownership over the premises, and the rental income of the spouse included in their tax filing. The spouse should also have an independent source of income other than the rent received. The deduction cannot be claimed if the claimant is a co-applicant of a housing loan for the accommodation along with the spouse.

We would like to bring your focus on a recent case decided by ITAT Delhi, wherein Abhay Kumar Mittal vs DCIT, the Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) has held that IT Act does not prohibit claiming HRA exemption on the rent paid to one’s spouse. The ITAT held that there is no bar on the part of the assessee to extend the loan from his known sources of income to his wife. Similarly, there is no bar on the assessee’s wife to repay the loan from her own mutual funds and fixed deposits. The assessee has paid house rent and the recipient, the assessee’s wife has declared the same under the head “income from house property”

To conclude this article, the spouse’s ownership of the house and the duly paid rent receipts are submitted as proof then the Income Tax Exemption will be allowed.

Evade Tax HRA Exemption Income Tax Act Rent Rent paid to Parents Rent paid to Spouse Tax Patrika Tax Planning
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