Can you claim Income Tax benefit on HRA if living with parents during work from home?

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Updated: September 21, 2021 5:09 PM

Income Tax benefits on HRA during work from home: Tax exemption on House Rent Allowance (HRA) is an important benefit available to salaried persons.

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Income Tax Benefit on HRA During Work From Home: Tax exemption on House Rent Allowance (HRA) is an important benefit available to salaried persons. HRA comes as a part of salary and can be availed by employees who are living in rented accommodations.

However, in FY 2020-2021, a large number of salaried individuals, especially youngsters, stayed away from their rented accommodations and worked from home while living with their parents. Now such employees are wondering whether they can claim HRA if they have lived with their parents during work from home. If yes, then how? This article explains this query in detail. But first, let’s understand who is eligible for HRA and how it is calculated:

Who gets HRA and how is it calculated?

HRA is available only for salaried individuals and comes as a part of the salary. Partial or full exemption from tax on the amount received as HRA is available for employees living in rented accommodations. However, HRA is fully taxable for employees not living in rented accommodation. As such, one condition needs to be met for claiming tax HRA benefit:

  • HRA tax benefit can be claimed only for the actual rent paid by the employee. This means HRA tax benefit can’t be claimed if the rent is not paid.

HRA calculation: Tax exemption in lieu of HRA is available on the least of the following amounts:

  • Actual HRA received by the employee
  • 50% of salary (Basic + DA) for employees living in metro cities. And 40% of basic + DA for employees living in non-metro cities.
  • Actual rent paid minus 10% of salary (Basic+DA)

Now, when it comes to salaried employees who have been living with their parents during work from home, the tax benefit on HRA will not be available if they have not paid any rent. However, this facility can be availed by those individuals who have paid rent to their parents.

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No HRA tax benefit if no rent is paid

“An employee, in receipt of House Rent Allowance (HRA), is ineligible to claim tax exemption for such HRA if he/she owns the residential accommodation occupied by him/her or has not actually incurred any rental expenditure i.e. HRA received can be claimed as an exemption only if the rental expense has actually been incurred by the employee on the residential accommodation occupied by him/her,” Sundara Rajan TK, Partner at DVS Advisors LLP, told FE Online.

When employees living with parents can claim HRA benefit

“In the case of employees living with their parents, the exemption may be claimed towards HRA by making rental payments to the parent(s). It shall be noted that in such a scenario, the rent paid to parent(s) should mandatorily be disclosed as rental income in the ITR of parent(s). Additionally, a rental agreement needs to be duly executed and submitted as proof of payment,” said Rajan.

Now, if someone has actually paid rent to his/her parents, then this should reflect as rental income in the ITR of the parents. And a rental agreement should also me executed and submitted as proof of payment.

As Rajan says, “In practice, there would be fewer instances of a son or daughter getting into such rental arrangements with their parents. Further, the income tax department would be vigilant on these kinds of inter-family transactions, which might result in scrutiny and assessments”.

The Income Tax Return filing season for FY 2020-2021 is already on. The ITR filing due date was recently extended till 31st December 2021.

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