Leveraging your HRA better to claim tax deductions
We go about trying to claim exemption from taxes in so many ways, but seldom do people realize that investing in ones parents or family is a wise way to manage a part of your tax planning. The best way to go about it is by paying your parent’s ‘house rent’ if you live with them. Here’s how you can go about it.
As a salaried professional your total annual CTC would have the component of House Rent Allowance (HRA). Deduction on HRA is possible if you live in a rented apartment and/or have a rent agreement. As per Section 10 (13A) and rule 2A of the Income Tax Act, exemption in respect of house rent allowance is based upon the following:
An amount equal to 50 per cent of the salary, where the residential house is situated at Bombay, Kolkata, Delhi or Chennai, and an amount equal to 40 per cent of the salary in the case where the residential house is situated at any other place.
Actual House Rent Allowance received by the employee in respect of the period during which rental accommodations is occupied by the employee during the previous year.
The rent paid in excess of 10 per cent of the salary.
You can enter into a rent agreement with your parent(s), depending on whom the residence belongs to, and transfer money into their bank account each month. Do keep in mind that exemption on HRA deduction from salary is not allowed if the Assessee is living in his own home or if the Assessee is not paying any rent for house. The amount you pay as rent to your parents will form part of their overall income and they will have to declare rent receipts in their return. In turn, they can claim a flat 30 per cent of the annual rent as deduction. All this can be claimed for maintenance expenses such as upkeep, repairs, bills, insurance and possibly savings, irrespective of the actual incurred expenditure.
For retired / dependable parents, who do not have any taxable income, this payment in respect to house rent you make in their hands could be tax free depending on the rent you have paid them. If the house is jointly owned by your parents, the income could be divided among them separately. This could be more beneficial to your parents as they can show a separate tax liability.
Keep in mind that if your parents are senior citizens (over 60 years old and less than 80 years old), they are exempt from paying tax on income up to Rs 2,50,000. If their age is more than 80 years old, their income is exempt up to Rs 5,00,000.
So all-in-all, investing in your parents could turn out to be fruitful for both, them and you!
Vikram Ramchand, Founder at MakeMyReturns.com
Vikram is a serial entrepreneur – having successfully founded two consumer internet companies. His latest venture is makemyreturns.com, an online tax filing and planning service. He holds a Bachelors in Computer Science from the Georgia Institute of Technology and an MBA from the London Business School.
The views expressed in this article are author´s own.
