HRA is a tax exemption and it is available only to the salaried individuals who opting for old tax regime. HRA is calculated based on the salary structure, salary amount, and city of residence. The actual amount which you can claim for deductions under HRA will be the lowest of the three provisions:
- The amount an employee receives as the HRA from the employer.
- The actual rent paid minus 10% of the basic pay.
- 50% of the basic pay if the employee stays in metro and 40% for non-metro.
Shall you pay rent to your wife?
Neither the Income-Tax Act, 1961 nor the Income-Tax Rules, 1962, prohibit claiming HRA exemption on the rent paid to one’s spouse. Here is recent decision given by the Delhi Tribunal in February in the case of Abhay Kumar Mittal vs. deputy commissioner of Income-Tax (I-T) wherein it was held that if the rent is paid to the wife and her income resources, including the rent income, are proved in the income tax return (ITR), then the benefit of HRA cannot be denied to a husband.
Neither the Income-Tax Act nor the Income-Tax Rule prohibit claiming HRA exemption on the rent paid to one’s spouse
Legal documents are important in claiming the HRA. Here is list of considerations you have to consider before claiming HRA by paying rent to your wife.
1. A legal rent agreement should be entered into with the wife, rent should be paid regularly and the wife should issue rent receipts to the husband. The taxpayer has to submit the rent agreement and rent receipts along with Form 12BB to his employer to claim HRA. Rent receipt should contain the tenant’s name, landlord’s name, rent amount, date of payment, rental period, house address, the signature of the landlord, PAN of landlord and revenue stamp if the rent is paid in cash above ₹5,000.
2. The house should not even be partially owned by the husband. The wife should be a legal owner. Wife should have an independent source of income other than this rental income.
3. Rent should have paid by bank transfers or money transferred through cheque.
4. The rent income should be declared in the ITR of the wife. It is advised that even if the wife falls below the basic exemption limit, she should still file ITR to prove the legitimacy of the arrangement.
5. In the case where the house property owned by the wife is funded through a loan where the husband is a co-applicant, it is as good as giving a loan to a wife for repaying the bank loan. As mentioned in the case of Abhay Kumar Mittal, I-T rules do not restrict the husband from giving a loan to his wife. I will reiterate that the wife having some independent source of income will prove that the transactions are genuine and avoid litigation.
6. You must have a certain distinguish and private space which is your rented portion of the house. Means that you can’t pay rent to your wife in case you are staying in 1BHK home.
Before deciding on this option, a couple should calculate their individual tax liability based on their income. In case wife is in higher tax slab, this arrangement would not make any difference. In other words, it would not make any sense where both the spouses fall in the same tax bracket. It would be beneficial only your wife is in lower tax slab and you are in higher tax slab.
In case your wife income is in lower tax slab, it would be beneficial on tax savings.
The rules are same in case you are staying with your parents. You should have all the legal document for paying rent to your parents. Make sure you have all the necessary document to prove your employer and income tax department on HRA exemption. Saving tax is first step in your personal finance, investing the saved tax in important in wealth creation. Happy Investing.
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