Income Tax: Fake HRA claims will be costly, Income Tax Department is going to change this rule..

The new income tax rules propose a change to claiming House Rent Allowance (HRA), which could impact claims where rent is paid to parents, siblings, or other relatives. Starting April 1, salaried individuals may be required to clearly disclose their relationship with their landlord when claiming HRA tax benefits. Sandeep Jhunjhunwala, partner at Nangia Global Advisors, said in a Live Mint report that this is intended to prevent misuse of the exemption, especially in cases where rent is shown to be paid to family members to reduce tax liability. If this rule is implemented, tax authorities may conduct more stringent scrutiny of HRA claims.

Why is this being done?
HRA can be claimed by salaried individuals who pay rent for the house they live in. In cases where an individual lives in a house owned by their parents or other relatives, it is legally permissible to pay rent and claim HRA, provided the arrangement is genuine. The relative must be the legal owner of the property, the rent must be paid, and if the relative's net income exceeds the exemption limit, the rent received must be taxable in their hands.

However, this rule is often misused. In some cases, taxpayers claim to have paid rent to their parents or relatives without actually transferring the money. Sometimes, the rent is shown as paid in cash, and HRA is claimed without proper documentation. While employers typically ask for rent receipts and rental agreements before granting HRA exemption in salary calculations, they do not always ask for proof of payment. Therefore, fake agreements and fabricated receipts can be used to support false claims.

What the new rule says

The responsibility for detecting such cases largely rests with the Income Tax (I-T) department. Returns are processed electronically by the Centralized Processing Center (CPC), making it difficult to manually examine the details of each HRA claim. The system may flag large HRA claims for closer scrutiny, but smaller amounts may go unnoticed. Now, taxpayers will be required to disclose their relationship with the landlord in their income tax returns, making it easier for the department to detect such cases. Jhunjhunwala said in a media report that even now, if rental arrangements that are not genuine are subject to scrutiny, they may be rejected. However, asking tenants to disclose their relationship with the landlord in the new Form 124 will ensure transparency from the outset and prevent fake or inflated rent claims.

How to Claim HRA on Rent Paid to Relatives
To claim HRA correctly, it's important to follow the correct process and maintain clear financial records.

First, you should pay rent electronically through bank transfer, check, or UPI, rather than cash. If you use cash, the IT department can verify the payment by looking at your ATM withdrawal history or other proof of fund transfer.

Second, a valid rent agreement and original rent receipts are essential. These documents not only serve as proof for the employer but also protect the tenant in case of an investigation by tax authorities.

Third, the parent or relative receiving the rent must report this income on their tax returns. Under the new tax system, if the relative's net income, including rent, exceeds ₹4 lakh annually, they must file a tax return and declare the rent as taxable income. If their rental income exceeds their net annual income of ₹1.2 million, they will also have to pay tax on the rent received.

Paying higher rent requires additional compliance. If the monthly rent exceeds ₹50,000, the tenant must deduct 2% tax deducted at source (TDS) and deposit it with the tax department in March or at the end of the tenancy.

Interest on TDS Deposits
Jhunjhunwala stated in the report that non-deduction of TDS attracts 1% interest per month, while non-deposit of deducted TDS attracts 1.5% additional interest per month. Delays in filing e-TDS returns attract a penalty of ₹200 per day until the return is filed, limited to the TDS amount. In 2025, the tax department sent notices to taxpayers who had large HRA claims but had not paid TDS. Additionally, last week, the department sent notices to high-income taxpayers questioning their inflated HRA and leave travel allowance claims. Following this mandatory disclosure, more such notices and penalties are expected for claiming HRA on paper without financial proof or for not complying with TDS rules.

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