Rent Paid To Relatives Under Scanner; Centre Proposes Stricter HRA Rules Under Income-Tax Act 2025
Rent Paid To Relatives Under Scanner; Centre Proposes Stricter HRA Rules Under Income-Tax Act 2025
Tenants may have to disclose relationship with landlord; higher scrutiny, TDS checks likely from April 2026
The Central government has proposed major changes to the way House Rent Allowance (HRA) claims are filed under the new Income-Tax Act, 2025, signalling tighter scrutiny of rent paid to relatives such as parents, in-laws and spouses.
The new law, which will replace the six-decade-old Income-tax framework, is scheduled to come into force from April 1, 2026. Along with it, draft Income-tax Rules, 2026 and revised forms for returns, audits and tax claims have been released for stakeholder feedback. Final rules are expected to be notified next month.
One of the key changes relates to HRA claims by salaried employees. Under the existing system, employees are required to submit rent receipts and provide the landlord’s PAN if annual rent crosses the prescribed threshold. However, under the proposed Draft Rule 205 read with the new Form No. 124 (which replaces the earlier Form 12BB), employees will also have to disclose their “relationship with the landlord, if any.”
This additional disclosure could bring intra-family rent arrangements under sharper examination. Paying rent to parents is a common and legitimate tax planning practice, provided there is a valid rent agreement, regular payment and proper declaration of rental income by the landlord. However, with a specific column capturing the relationship, the Income Tax Department will have structured data to identify related-party transactions more easily.
Tax authorities may use analytics to cross-verify whether the landlord has declared rental income in their Income Tax Return and Annual Information Statement (AIS), whether the landlord actually owns the property, and whether rent payments were made through proper banking channels.
The draft rules also clarify that rent paid to close relatives can qualify as valid rent under tax law, provided the arrangement reflects a genuine lease with documented terms. However, if rent exceeds specified limits, Tax Deducted at Source (TDS) provisions under Section 194-I may apply. In such cases, tenants may be required to deduct TDS, and failure to comply could invite penalties.
Another significant risk area is misreporting. Under Section 270A, misreporting of income can attract penalties of up to 200 per cent of the tax payable. With mandatory disclosure of the landlord relationship, it may become more difficult for taxpayers to claim oversight if incorrect or inflated HRA claims are detected.
In addition to HRA changes, the draft rules increase the responsibility of Chartered Accountants and auditors, particularly for Foreign Tax Credit (FTC) claims. Under the revised Form 44, auditors will need to verify foreign tax deduction certificates, proof of payment, correct currency conversion and applicable tax treaty provisions.
Tax experts advise salaried individuals especially those paying rent to relatives, to strengthen compliance. This includes executing a formal rent agreement, ensuring payments are made through banking channels, maintaining documentation of ownership and payment records, and confirming that the landlord properly declares rental income.
The proposed changes reflect a broader shift toward data-driven tax administration and early detection of questionable claims. While genuine taxpayers may only face additional compliance requirements, loosely structured or informal family arrangements may invite scrutiny.
The Central Board of Direct Taxes (CBDT) has invited public comments on the draft rules before final notification.
Disclaimer: This article is for general informational purposes only. Tax laws are subject to change. Readers are advised to consult a qualified tax professional for advice specific to their situation.
