Are you paying rent to Close Relative for HRA ?

Are you paying rent to family member for HRA Exemption?

Given that the options available for salaried class assessee to save tax are very limited, many of them try to take full advantage of various exemptions available under Income Tax Act, out of those one of them is HRA which is mostly used by all the employees. They take HRA Exemption by paying rent to a family member with whom they are residing.

The question arises whether is it illegal to pay rent to a close relative or not?

There are two contrary judgement of Mumbai ITAT and Ahmedabad ITAT. Mumbai ITAT denied the claim of HRA where assessee paid rent to her mother in cash and on the other hand Ahmedabad ITAT allowed the exemption who paid rent to his spouse. The decisions of ITATs in both the cases is different, however, the basis of judgement remains the same and followed by both the ITATs.

In the case decided by Mumbai ITAT, assessee paid rent to her mother in cash but failed to substantiate it. Assessee contented that she lived with her aging mother to take care of her and paid rent to her mother in cash. While rent receipts were obtained by her, as the transaction was with her mother, she had not entered into any formal contract. Assessee was not able to produce proof of cash withdrawls from her bank to substantiate the rental payments. Moreover, assessing officer were able to prove that she was not residing with her mother, but in another apartment nearby with her husband and daughter.

While in the case decided by Ahmedabad ITAT, assessee paid rent to his spouse. Assessee was living with her spouse and paid rent through bank transfers. ITAT held that both the conditions of not owning the house by assessee and payment of rent is fulfilled and hence exemption allowed.

Both the ITAT judgement draws outline for claiming HRA exemption by employees and the precautions which employer should take while allowing the deductions.

1. Employee must not be staying in accommodation owned by him.

2. Employee must have actually incurred and paid the rent expense.

3. Employee must provide the declaration in Form 12BB to employer regarding Lease Property and Landlord.

4. Exemption is available as per limit provided under section 10(13A) of the Income Tax Act.

5. Proof of Rent paid must be submitted by Employee to Employer.

Conclusion: Payment of rent to parents or spouse of assessee will not decide the eligibility of HRA exemption claim as long as the above mentioned conditions are fulfilled and transaction is genuine. It is not illegal to pay rent to parents or spouse but it carries a risk of deeper probe by the Assessing Officer and if assessee failed to prove genuineness, the claim would be denied and consequences will follow.