Tax exemption on HRA in India

Question

I am fresh out of college working in Bangalore, and have not much idea about the income tax system in India. Here is my salary structure:

Basic - Rs. 12,50,000 pa
HRA - Rs. 6,25,000 pa

I looked up about tax exemption on HRA and as per my current understanding, it is minimum of three(the actual HRA, 50% of base salary, house rent paid less of 10% of base salary). The first two in my case evaluate to 6,25,000. I live with my mom, who's a housewife and has no source of income.

Now, consider the scenario:
I pay 62,500 per month as rent to my mom. So the third component also becomes 6,25,000. My mom now has a income of 7,50,000(6,25,000 + 1,25,000(10% of base)) which falls in a lower tax bracket and pays tax on it.

Things I want to know:

Does it seem that this will work, as in legally it sounds okay to me, but will the income tax people have issues with it(like me paying rent to my mom).
What are the things I need to take care of?
I read about some tax benefits a person receives on income from rent, but couldn't get it properly. Can someone explain it in some detail.

Thanks a ton in advance.

Dheer · Answer

Please consult a CA.

Does it seem that this will work, as in legally it sounds okay to me, but will the income tax people have issues with it(like me paying rent to my mom). What are the things I need to take care of?

If the house is in your mom's name; it is perfectly legal to pay a rent to Mom. She needs to declare this as her income and pay taxes accordingly. You need to have proper evidence of payments [preferably via Bank Transfer] and signed receipts with PAN included. The rent paid should not be artificially high and has to be inline with normal rentals in the area. i.e. if the normal rent in the area is 10K; showing 62K will land you into issue if there is scrutiny.

I read about some tax benefits a person receives on income from rent, but couldn't get it properly. Can someone explain it in some detail.

You can deduct this [Rs 6,25,000/-] from your taxable income; so you would be saving approx 2,00,000 in taxes.

Abdul Rehman Sayed · Answer

There is a good tax calculator here for salaried here.

Add your breakup, rent, etc & see how much you can save via paying rent.

For things you need to care of :

1) Since you are giving more than 50K per month as tax. you will need an agreement with your Mom.

2) Diligently transfer the amount via netbanking or cheque & take rent receipt signature.

3) You will have to withold TDS @10% by max last month & submit it to the government.

4) Your Mom can file a return & take that back. ( Provided she gives some "Expenses", etc )

It is best you contact a CA. If it was less than 50K, you could have done it yourself.

Tax exemption on HRA in India

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