Claiming tax exemption showing rent paid to relatives? Five things to keep in mind
- The property must be owned by the parent or relative to whom the rent is being paid.
- The relative who is getting the rent should disclose it in his income tax file.
- The municipal taxes on the property should be up to date, and a deduction can be claimed on the taxes paid.
AdvertisementIf you are employed, and receive a house rent allowance (
Here are five things to keep in mind in case you are paying
Fair market value
The rent has to be similar to the fair market value. “It cannot be very high or very low. One has to see that the rent that is being paid to the relative/parent is in consonance with the rent paid to an independent party to another independent party,” says Vivek Jalan, partner, Tax Connect Advisory.
The property ownership detail
The property must be owned by the parent, or relative to whom the rent is being paid.
In case when the rent is paid to parents, the property must be owned by your parents. “It may be owned by one or both of your parents. So, you can deposit the money to any one of the parents in case of joint house ownership, or to the parent who is the legal owner of the house,” says Archit Gupta, founder and CEO, Clear, a fintech company.
There has to be a rent agreement between you, and your parents/relative, and you need monthly rent receipts. The rent can be paid either through a transfer to a bank account, or through a cheque. One should also keep proof of payments made.
The recipient has to disclose income
The relative who is getting the rent should disclose it in his income tax file for taxation purposes. “The Income Tax department can check through data analytics whether the rental income has been declared,” says Jalan. The income should also be declared under ‘Income from house property’. “If it is declared as ‘Income from other sources,’ a red flag will be raised, and also the deduction on taxes paid will not be available,” says Jalan.
Further, the municipal taxes should be up to date, and a deduction can be claimed on the taxes paid,” says Jalan. The person who receives rent is entitled to claim a deduction of 30% on the rental income for repair or renovation purposes.
AdvertisementDisclose to employer
Employees should disclose the rent paying arrangement to the employers as soon as possible, and not wait for the employer to ask for details. If they do not do that, TDS will be deducted, and they will have to claim a refund later.
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