Paying rent to Sister to claim Tax on HRA

POSTED BY Satishshm ON January 28, 2014 11:38 am COMMENTS (11)

Hello,

I am living in my sisters own house along with my sister and her husband. As we are from same family, I have not paid any rent officially. I am eligible for HRA of 2.5 lacs per anum. Can I take an agreement with my sister that I am paying 2.5 lacs per anum as rent. My sister earns about 1 lac through teaching. She has got a PAN card recently and will pay the tax for the income she has earned. Are there any complications in this transaction?

Thanks,

Satish

11 replies on this article “Paying rent to Sister to claim Tax on HRA”

  1. ashalanshu says:

    Dear Satish, to claim full HRA tax free for you, you need to pay rent in excess of 10% of your basic salary. So if you are paying 450000 Rs. rent to your sister, 10% of your basic = 75000.

    hence excess rent = 450000 – 75000 = 375000

    As your HRA is 350000 Rs. and actual excess rent paid by you is 375000 Rs. you can claim full HRA tax free.

    To pay that much amount or not to your sister is your choice.

    Thanks

    Ashal

  2. Satishshm says:

    Thanks Ashal. I think claiming 4,50,000 would be too much in a city like Tirupati. The rent in my sister’s locality ranges from 2,00,000 to 3,00,000 for a decent 2/3 BHK flat.

    Just curious to know what would happen if I claim more (i.e I will make an agreement with my sister for 4,50,000, transfer the amount monthly to my sisters’s account and she pays the tax)

  3. ashalanshu says:

    Dear Satish, to claim all the HRA tax free, you w’d have to pay around 4.5L Rs. as rent to your sister. this 4.5L Rs. rent payment to your sister ‘ll force her into 20% Tax slab as her combined income ‘ll be around 5.7L Rs.

    Thanks

    Ashal

  4. ashalanshu says:

    Dear Satish, as your HRA amount is 250000 Rs. what is the basic salary you are receiving and in which city you are residing?

    Thanks

    Ashal

    1. Satishshm says:

      Basic:7,50,000
      HRA:3,75,000
      Others(includes special allowance, conveyance, medical etc…):3,75,000

      I reside in Tirupati, AndhraPradesh. After calculations, I found that my HRA eligibility is 3,00,000(not 2,50,000).

  5. Satishshm says:

    Thanks Ashal.
    She will definitely pay the tax for the income earned through the rent and her own income. I will do an online transfer of funds to her account from my account for auditing purpose. (Any way the amount will be with in us 🙂 )

    Thanks,
    Satish

  6. ashalanshu says:

    Dear Satish, if she is the owner, you can indulge in this HRA saving thing. Do remember, your rent payment (on paper) to your sister is a taxable income for her and she w’d have to pay tax on this rental income although in actual there ‘ll be no income for her from you as from your original query, you are not going to pay to your sister in actual. 🙂

    Thanks

    Ashal

  7. Satishshm says:

    My sister is the owner of the house

  8. ashalanshu says:

    Dear Satish, who is the owner of the house? Your sister or your BIL?

    Thanks

    Ashal

  9. divya.advisor says:

    i presume your sister owns the house and she bought it from her own funds or her husband bought it. How does she she show her teaching income currently.

    if yes you can get into a rental agreement with her and you get tax exeption and she files IT return showing income from you. Do not forget to transfer money into her account every month to keep things clean.
    best to speak to a tax expert but if your sister can be an income tax assesse

    1. Satishshm says:

      Dear Divya,

      Thanks for answering.

      My sister has bought it on her own money. As she is teacher in private school and there is no payslip and her income is 1,20,000 she has not filed income tax. She got PAN card 2months back.

      This year as she is receiving rent and her income is crossing 2lacs, she will pay tax accordingly and file ITR V.

      Thanks,
      Satish

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