Maximising HRA benefit: Can I pay more than the actual rent to my relatives in FY 2025-26?

The new tax regime allows zero tax on income of up to ₹12 lakh under the new tax regime from FY 2025-26. This makes it a no-brainer for most taxpayers to choose the new tax regime over the old tax regime.

However, if a taxpayer has deductions over ₹5 lakh, then opting for the old regime may still be beneficial.

House Rent Allowance (HRA) is a very common exemption used by taxpayers in the old tax regime to reduce their taxable income.

As per Section 10(13A) of the Income Tax Act, 1961, for salaried individuals, the lowest of the following amounts can be claimed as HRA exemption:

• Actual HRA received,

• 50% of basic salary and dearness allowance for those living in Delhi, Kolkata, Mumbai or Chennai (‘metro cities’),

• 40% of basic salary and dearness allowance for those not living in metro cities and

• Actual rent paid minus 10% of the basic salary and dearness allowance.

This limit may make many salaried taxpayers pay money to their relatives who make less than ₹12 lakh during a year. However, it is critical to ensure the following before claiming an HRA exemption:

• Pay rent through banking modes. Avoid cash transactions to evidence the payment.

• Have a valid rent agreement. Ensures legitimacy and avoids scrutiny.

• The landlord must declare the rental income in their ITR.

• The rental value must be at arm’s length price, i.e., a fair rent value of a similar property let out in nearby areas.

• Deduct 2% TDS under section 194IB in case the rent exceeds ₹50,000 per month.

A natural question that may arise would be, will the income tax department check all this?

The income tax department, with its intelligence unit, can easily cross-reference the income tax exemption you claim from the income your landlord declares. They can also check if the rent is exorbitant as per your income or your place of stay. Having said that, you need not worry if you have all the documentation mentioned earlier in this article.

Has income tax department done such an investigation in the past? Yes, not only are there reports of taxpayers getting notices on bogus HRAs, but there’s also an established case law of Meena Vaswani vs ACIT [ITA No. 1984/Mum/2015].

The interesting case of Meena Vaswani vs ACIT

In the Meena Vaswani vs ACIT case of 2017, the Mumbai Income Tax Appellate Tribunal (ITAT) disallowed an HRA exemption to Mrs Meena Vaswani.

• The taxpayer claimed that she paid rent in cash to her mother.

• The mother didn’t declare this rental income in her ITR.

• There was no contractual agreement between the two parties.

• An inspection by the tax officer revealed that the taxpayer didn't live in her mother’s house.

• There were no documents related to information about tenancy to the building/ society.

Based on the above, the tribunal disallowed the HRA exemption.

There’s no bar in paying a fair rent to your relative if you actually have rented their house, paying them a fair rent via banking modes and have all rent documentation like rent agreements and slips to substantiate your claims in case questions are ever raised by income tax authorities.

What do practising CAs say?

When asked about paying significantly more rent than the fair value, CA Nikunj Gupta, a practising CA based in Delhi-NCR, said: “Though there is no explicit prohibition in claiming HRA exemption where rent payments exceed the fair market value, such a significant difference, along with the relationship between the parties, may raise suspicion if scrutinised by the tax authorities."

"Consequently, the taxpayer would need to provide sufficient evidence regarding the ownership of the property by the relative, actual occupation of the premises by the taxpayer, specific reasons justifying the higher rent, payment of rent (preferably through banking channels) and declaration of rental income by the relative in his Income Tax Return (ITR).”

Nikunj further said that if these conditions are not adequately satisfied, the Assessing Officer may partially or fully disallow the HRA exemption, disputing the genuineness of the transaction.

CA Abhishek Agrawal, a practising CA based in Mumbai, said one cannot claim HRA exemption on rent paid to a relative if the amount exceeds the fair market value.

“No, you cannot claim HRA exemption for rent paid to a relative if the amount exceeds the fair market rent for a similar accommodation in that area. The Income Tax Department may disallow the excess amount, as it's not considered a genuine expense,” he said.

Agrawal further said that rent to relatives is allowed under HRA rules, but:

• It must be genuine: There should be actual payment, with bank transfers or receipts.
• It should be at fair market value: If the rent paid is inflated to claim a higher exemption, it can be disallowed.