HRA, Sublease and Rent payment

After HRA calculation, i can get maximum benefit if i pay 60000 per month as rent. But I am from a small town, and rent near my home is around 10-15k. Is it okay if i pay 60000 to my parents as rent? Is there any restriction of how much rent we can pay to parents? Is there any risk involved?

@Sakshi_Shah1 can help

Hey @ram

To calculate HRA exemption, here is the calculation:

  • Actual House Rent Allowance from employer
  • Actual rent paid less than 10% of basic salary
  • 50% of basic salary if you live in a metro city or 40% of the basic salary if you live in a non-metro city.

The rent paid should be genuine as per the market rates and not unreasonable. This is something that the AO (Assessing Officer) can question after issuing a tax notice. Further, there must be a rental agreement as a documentary proof for the rent expense.

You can read more about HRA here - House Rent Allowance : Rules, Exemptions, and Calculations

Hi,

Can a landlord sublease his home to his wife who does not have any income, and thereby save on tax. Effectively, he will collect a smaller amount as rent and then his spouse sub leases to tenants at a premium and records as income from business while the landlord pays tax on the nominal rent from his spouse. This is to ensure a sustainable remuneration.

a. Can the tenants claim HRA for paying rent to spouse?
b. Can the landlord collect rent from his wife as arrears in the subsequent year as per agreement.
c. Is there any potential issue if all of it is declared and filed?
d. Are there any changes to the treatment if the landlord leases to his spouse with sub lease for more than 12 years?

Hello @UrbanNitin,

To answer your questions:

a. Tenant can claim HRA for rent paid by him.
b. Rent can be collected as per the rent agreement.
c. Yes, it can result into a potential issue. As per section 60 of Income tax act, If an individual transfers any income without transfer of asset then such income shall be taxed in the hands of transferor.
d. Period of lease might attract other acts, but it is unrelated to tax provisions.

Hope this helps!

Thanks so much for this. So profits from leasing or sub leasing activity is not really entertained? How can this be construed as a business activity wherein the spouse is sub leasing the home to tenants on a composite basis.

Hey @Bharti_Vasvani can you take a look?

Hey @UrbanNitin,

Rent received from sub-leasing is taxed under income from other sources and not business income.

Hope this helps!

Thanks, but in any form of leasing including sub leasing, the asset is never transferred but solely used. So, all forms of sub leasing will always be taxed to the asset holder?