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| Essential Tips for Renting from Family/Image Credit: RDNE Stock Project |
If you're currently employed and receive a house rent allowance (HRA) as part of your salary, there's a chance for you to claim a tax exemption on the HRA if you reside in a rented house. It's essential to understand that this tax exemption applies specifically to the old tax regime. Moreover, if you live with your parents or a relative and pay them rent, you can still claim an HRA deduction.
Here are five key points to consider if you're paying rent to your parents or a relative:
Fair market value
The rent you pay should be reasonable and in line with the fair market value. It must not be too high or too low. Check that the rent you pay to your parents or relatives is comparable to what you would pay to a third party.
Property ownership
The parent or relative to whom you are paying rent must own the property being rented. If you're paying rent to your parents, one or both of them must own the property. If the house is jointly owned, you can deposit the funds with either parent or the legal owner.
Rent agreement and receipts
A rent agreement between you and your parents/relative is essential. In addition, you must obtain monthly rent receipts. Rent can be paid with either bank transfers or cheques. Maintain accurate records of all payments made.
Income disclosure by the recipient
For taxation purposes, the relative receiving the rent must disclose it in their income tax filing. The Income Tax Department can use data analytics to determine whether or not rental income has been declared. Rental income should be reported under the heading "Income from house property." Declaring it as "Income from other sources" may raise a red flag, resulting in the inability to claim tax deductions. If municipal taxes are current, the recipient can also claim a 30% deduction on rental income for repair or renovation purposes.
Inform your employer
It is critical to notify your employer as soon as possible about the arrangement for paying rent to your parents or relatives. Don't wait for them to ask for more information. Failure to disclose this information may lead to tax deducted at source (TDS) by your employer, and you would then have to claim a refund later.
Note: If you are an international reader, remember that these are general guidelines that may differ depending on your country's specific tax laws and regulations. It is best to seek personalised advice from a tax professional or financial advisor regarding your specific situation.