Pre-Planning of refunds and exemptions is significant to e-filing of IT return. For some effective tax saving, one must ensure to get complied with all guidelines relating to different sections, for which taking an expert advice is always recommended. While in some situations, investment strategies made in name of parents to an extent can also help to lower down tax burdens. To elaborate this more, we have reported out one such strategy or we say a loop hole that might convert taxable part of your salary to be tax exempted.
For a salaried employee, HRA (House rent allowance) is a residential support given by employer as a part; additional to salary for paying rent expenses. Like other perks HRA is taxed in hands of the employee to a value as determined under tax slabs, if he resides in a rented accommodation but if in a situation employee lives in a house accommodated by his parents then the receivable HRA becomes fully taxable.
Thus, for self accommodated employees only some usual techniques developed over practice by some expert professionals are available for saving tax, such as getting HRA tax exempted by paying rent to parents, paying home loan interest on principal of owned house, while residing on a far place for doing job etc.
How rent paid to parents would affect my HRA Tax ability?
If you have received some HRA perk in your salary and living in a self- accommodated house with your parents, the general tax rule says that your HRA will now be taxed to the whole amount received by you from the employer. As it seems difficult to save the earned amount from taxman, we recommend a highly practiced thought of making a rent amount cheque to parents that will work as a resultant to make your HRA tax-free.
While the strategy works as a gift to tax payer income, it cannot be called as a full amount exemption method since it works as a divergent from individual taxable amount to parent’s tax liability. Say if you are in a tax bracket of 30% and your parents in 10% bracket and you opt for paying them HRA as rent then the required amount would become taxable in their sphere at 10%, which results in making a net saving of 20% to the tax payer.
Also Read: Have You Submitted Your Income Tax Saving Proofs Till Now?
Are their any restrictions to this technique?
Likely to say for every rule their are some do’s and don’ts which need to be complied before applying to any situation. The same applies with this thought also, a tax payer need to study some basic limitations before applying this exemption to practical use as :
- Property accommodated should be registered in name of parents
- Payment of rent to parents is to be done through a bank account transaction as the same can inspected by an assessing officer.
- If a deduction is claimed by an employee in this section, then no further deduction would be available as provided in Section 80GG
- For any repairing or maintenance charges no further deduction would be available.
- Payment of rent made to spouse cannot be claimed under this section .
- If an employee is residing in a rented house with parents and rent of house is paid by parents then the same could not be claimed as a deduction.
- If employee has its own house in the same city and is using it for rental income, then he cannot claim the above deduction.
So, an employee can use this advantage in a limited way, but it is important to discuss the concept more in detail with an expert before applying to any such exemption, as a small mistake done in aforesaid rule might end up resulting in some big penalty.