HRA Claim if you live with your parents.

As rental income is taxable for parents , one needs to consider Income Tax Slab of parents. One needs to sit down and workout whether paying rent to parents will actually help to save tax or not on net basis. You should save tax through transparent way. Any discrepancy in tax details may invite heavy penalty from income tax department. It is always advisable to consult tax consultant before claiming any tax exemption. Things that one has to consider while claiming HRA while living with parents are as follows:

• You must live in a rented accommodation.
• Parents must be the owners of the house. You can save tax only if you are paying rent to parent or parents who is owner of the property. If the property is jointly held by father and mother then rent should be paid to both of them.
• Documentation should be clear.You must have a rent agreement.
• Rent receipts: pay rent for the same through cheque/bank transfer. Get the Rent Receipts signed by your parents.
• Rental Income is taxable : They must show the rent received as rental income in their income tax returns.

Are you saving tax as a family when you claim HRA while living with your parents?

As mentioned earlier, Rental Income is taxable. The parent/parents must show the rent received as rental income in their income tax returns.  So you would be saving tax as family and complying with tax rules, if you and your parents are in different income tax slab.   When they are in a lower income bracket or they don’t have any income. Even when the house is jointly owned by both your parents, you can pay them rent proportionately, that will spread the rental income between them and may turn out to be more beneficial.  Your parents can invest this income in can be invested in their name  such as the Senior Citizens Saving Scheme, five year bank fixed deposits or tax saving equity mutual funds or other financial investments that can earn them a higher return based on their age.

If your parents are more than 60 years old (and less than 80 years old), they are not required to pay any tax on income up to Rs 2,50,000. And if they are more than 80 years old their income is exempt up to Rs 5,00,000.

Lets take an example.

• Say you are in 30% income tax slab.
• Your parents are retired and have no other source of income.
• They own the house.
• You live in the house.
• You pay Rs 32,000 a month, that is, Rs 3.84 lakh a year,
• Your parents can deduct 30% i.e 1,15,200 and have to pay tax on only Rs 2,68,800.
• For FY 2015-16, the amount that is over and above the basic Rs 2.5 lakh exempt limit  so you can invest in their name in tax free scheme such as PPF, tax free bonds, and bring down taxable income to 2.5 lakh.

You get a bigger benefit if the house is co-owned by your parents. Then they can split the earning from rent and show separate tax liability. The best part is you can decide how much rent you will pay to your parents provided rent is justified. It will help to save tax till optimum point. 

Rent Receipts 

To allow you exemption on HRA, it is mandatory for the employer to collect proof of rent payment ie rent receipt. The employer will give you exemption on HRA based on these rent receipts. TDS will be adjusted so you don’t have to pay tax on HRA. Your  tax liability will be calculated accordingly.  It would be reflected in Form 16.