News: Paying Rent to Family for HRA Legal, Disclosure Needed-21-02-2026

Salaried employees who pay rent to parents, in-laws or a spouse and claim House Rent Allowance (HRA) can continue doing so under the proposed Income Tax Draft Rules, 2026. What changes is disclosure: the draft requires the "relationship with the landlord" to be declared, a step aimed at curbing evasion, not banning genuine arrangements.

The draft rules, issued by the Central Board of Direct Taxes as part of the rollout of the Income-tax Act, 2025, say that when rent crosses a specified limit the tenant must state this relationship in addition to the landlord’s PAN. The article refers to the disclosure being made in Form No. 124 and, elsewhere, in Form 12BA. The same draft has also drawn attention for extending the 50% deduction to cities such as Bengaluru, Ahmedabad, Pune and Hyderabad.

Experts say Draft Rule 205 does not prohibit renting from relatives. The tenancy must be genuine, backed by a formal rental agreement, paid through banking channels and reported as rental income in the landlord’s return.

Take Ananya Sharma, a 35-year-old marketing professional in Pune who lives in her mother’s apartment and pays Rs 30,000 a month. She claims HRA exemption under Section 10(13A) read with Rule 2A, supported by an agreement, monthly bank transfers and rent receipts, and her mother declares the income. Under the draft she must now disclose that her landlord is her mother. Because the rent is actually paid, in line with local market rates and reported by both sides, her claim remains valid.

Rohit Jain, Managing Partner, Singhania & Co., said the rule does not make such rent illegal; it is designed to bring these transactions out of the shadows and ensure tenant and landlord report them consistently.

Tushar Kumar, Advocate, Supreme Court of India, described it as a calibrated transparency measure that lets employers and, more importantly, the Income-tax Department identify and examine related-party rent arrangements more precisely. It signals closer scrutiny, not disqualification, he said, consistent with the settled principle that tenancy between relatives is lawful but must pass the test of genuineness, commercial substance and actual payment, and must not be a colourable device for avoiding tax.

The reporting framework raises the compliance threshold and the exposure to penalties under Section 270A where a claim amounts to under-reporting or misreporting, especially where rent is fictitious, circular, unsubstantiated or not offered to tax by the landlord. The penalty is 50 per cent of the tax payable on under-reported income and can rise to 200 per cent for misreporting.

In bona fide cases, Kumar said, where rent is truly paid, documented, in line with the market and disclosed by the recipient, the exemption remains fully tenable and defensible on scrutiny. The rule’s purpose is greater accountability and evidentiary discipline, so that genuine claims survive examination and artificial ones are deterred.