New Tax Regime: Getting HRA benefit by showing rent paid to relative? It will create extra tax burden

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Updated: Feb 07, 2020 6:08 PM

Scores of salaried persons not only show rent paid to parents, but even to spouse with no or lower income, to get benefits of tax-free HRA.

income tax, Budget 2020, new income tax regime, tax benefits, house rent allowance, HRA, HRA benefits, rent paid, tax savings, rent paid to parents, rent paid to spouseUnder the New Income Tax Regime, there will be lower tax slabs and lower rates, but no deductions.

Sujit Choudhury (name changed) works in a managerial position in a multinational company (MNC) and stays in his parental house. As Sujit falls in 30 per cent tax bracket and his mother in a lower bracket with family pension as only source of income, he used to show rent paid to his mother to claim benefits on House Rent Allowance (HRA). Sujit also get his mother’s Income Tax Return (ITR) filed by showing both family pension and rental income as sources of income.

Not only Sujit, but scores of salaried persons not only show rent paid to parents, but even to spouse with no or lower income, to get HRA benefits, which is quite substantial, as the amount of House Rent Allowance varies from 40 per cent (for non-metro cities) to 50 per cent (for metro cities).

For example, if a person from a metro city has a per month salary structure of Rs 40,000 basic salary, Rs 20,000 HRA and Rs 20,000 other allowance and pays Rs 25,000 rent per month, his entire HRA will be tax free. So, out of his annual salary of Rs 9,60,000, he will enjoy 2,40,000 as tax-free HRA, which 25 per cent of gross salary.

So, a person with same salary structure may save Rs 48,000 tax through HRA benefit by showing rent paid to a relative in a lower tax bracket, even if he/she stays in his/her own house. On the other hand, the relative, would end up paying no tax (if there is no other income) or just 5 per cent tax (if there is very little income) by showing the rental income.

However, in this year’s Budget, Finance Minister Nirmala Sitharam has proposed a New Income Tax Regime, under which there will be lower tax slabs and lower rates, but no deductions and benefits, including HRA benefits.

So, under the New Regime, if you show rent paid to a relative, there will be no tax benefits for you, it would create an unnecessary extra tax burden for the relative.

So, it will be better under the New Income Tax Regime not to show that you are paying rent, unless you are actually staying on a rented accommodation and paying for it.

Going back to Sujit’s case, if he just stop showing that he is not paying rent for staying in the same accommodation, will there be any retrospective tax burden on HRA claimed so far?

“No. He can stop showing rent in the New Regime without any problem,” said CA Karan Batra, Founder and CEO of CharteredClub.com.

Archit Gupta, Founder and CEO, Cleartax also said, “He lives on rent, he pays rent – the assumption is that things are in place whether or not he gets a tax benefit. Or perhaps he will reevaluate his rent payments. Whatever be the case, HRA cannot be retrospectively taxed based on a change in law that has now taken away an earlier allowed provision, which was properly claimed by the taxpayer.”

“A taxpayer is entitled to arrange his affairs in a tax efficient manner. Accordingly, Sujit is entitled to stay with his mother without paying any rent being a relative. Mother is also not require to pay any tax on notional basis being this is a self-occupied property. However, sudden change in arrangement may lead into an enquiry by the tax department to understand the bona fide of rent paid in earlier years. He can demonstrate bona fide of rental arrangement with his mother by producing rental agreement, bank statement for payment, intimation to society about his tenancy, etc,” said Gopal Bohra, Partner, NA shah Associates LLP.

So, if you are not staying in a rented accommodation, but still showing rent paid to a relative, under the New Income Tax Regime, it will not give you any additional tax benefits, but will create extra tax burden.

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