HRA Claims Under Scrutiny in 2026 Draft Tax Rules: Employees May Need to Disclose Relationship With Landlord

Salaried employees who claim House Rent Allowance (HRA) may soon face stricter disclosure requirements under the 2026 draft income tax rules. According to the proposed changes, individuals claiming HRA benefits might have to reveal their relationship with the landlord, especially when the rent is paid to parents, relatives, or family members. The move aims to improve transparency in rent transactions and prevent false or exaggerated HRA claims.

The new draft rules are part of broader reforms being considered by the Income Tax Department to strengthen compliance and reduce misuse of tax exemptions. While paying rent to relatives is not illegal, authorities want to ensure that such transactions are genuine and properly documented.

Disclosure of Relationship With Landlord

Under the proposed guidelines, employees claiming HRA will need to provide additional details in Form 124, which is linked to Form 12BB, a document used for declaring tax-saving investments and expenses to employers. In this form, taxpayers may be required to disclose whether the landlord is a parent, sibling, or any other relative.

Tax experts say the rule does not prohibit renting a property from family members. However, the transaction must be real and supported by valid proof. If the payment is only shown on paper to claim tax benefits, it may attract scrutiny during assessment.

Key Requirements for Claiming HRA

To ensure that an HRA claim is valid, employees should follow several important guidelines. These include maintaining proper documentation and conducting rent transactions through verifiable channels.

Here are some important points taxpayers should keep in mind:

• A written rent agreement should be prepared and signed.

• Rent should be paid through bank transfer, cheque, or other traceable methods.

• The landlord must declare the rental income in their income tax return.

• If the annual rent exceeds ₹1 lakh, the landlord’s PAN must be provided.

• The relationship with the landlord should be disclosed correctly in the required form.

These steps help demonstrate that the rent arrangement is legitimate and not created solely to claim tax benefits.

How HRA Tax Exemption Is Calculated

Unlike deductions under sections such as 80C or 80D, there is no fixed maximum limit for HRA tax exemption. However, the exemption amount is calculated using a specific formula. The final tax benefit will be the lowest of the following three values:

1. The actual HRA received from the employer.

2. 50% of salary if the employee lives in metro cities like Mumbai, Kolkata, Chennai, or Delhi.

3. 40% of salary for employees living in non-metro cities.

4. Actual rent paid minus 10% of salary.

Among these calculations, whichever amount is the lowest is considered the eligible HRA exemption. This means the final tax benefit depends on a combination of salary, rent paid, and the city of residence.

Example of HRA Calculation

To understand how the exemption works, consider a salaried employee earning an annual package of ₹18 lakh and living in Mumbai in a rented home. Suppose the employee’s basic salary is ₹7,20,000 and the dearness allowance (DA) is ₹1,80,000. In this case, the salary considered for HRA calculation becomes ₹9,00,000.

If the employee receives ₹3,60,000 as HRA from the employer and pays ₹4,50,000 as rent annually, the calculation would look like this:

• HRA received: ₹3,60,000

• Rent paid minus 10% of salary: ₹4,50,000 – ₹90,000 = ₹3,60,000

• 50% of salary (metro city): ₹4,50,000

Since the lowest amount among these figures is ₹3,60,000, that would be the final HRA exemption allowed under tax rules.

Extra Caution When Paying Rent to Relatives

Experts say employees can legally claim HRA by paying rent to parents or grandparents. However, the rent must actually be paid and properly documented. A valid rent agreement, bank transfers, and correct tax declarations are essential.

At the same time, claims involving rent paid to a spouse may face closer scrutiny from tax authorities. Therefore, employees are advised to ensure all documents and financial records are accurate and consistent.

What This Means for Salaried Taxpayers

The proposed changes in the 2026 draft tax rules indicate that the government is focusing more on transparency and accountability in tax claims. By requiring disclosure of the relationship with the landlord, authorities hope to reduce misuse of HRA exemptions.

If implemented, these rules will encourage employees to maintain proper documentation and follow genuine rental arrangements. For salaried taxpayers, understanding these requirements in advance can help avoid complications during tax filing and ensure smooth processing of HRA claims.