ITR Filing: Essential inclusions for HRA tax exemption in rent agreement

Individuals who receive a fixed salary can be eligible for a tax exemption on their house rent allowance (HRA) if they reside in a rented house, pay rent, and possess specific valid documents. However, many people are not aware that their rental agreements must contain particular provisions to ensure that their HRA tax exemption, which they claim when filing their income tax returns (ITR), is not rejected by the Income Tax Department. The same rule applies to individuals who pay rent to their parents. Tarun Kumar Madaan, Head of Direct Tax at Coherent Advisors, told ET Wealth that individuals can avail HRA tax exemption even when they pay rent to their parents, as income tax regulations do not impose any restrictions on such claims. However, these individuals need to ensure that they possess all the necessary valid evidence (documents and proof of rent payments) to support their claim for tax exemption in their ITR, according to him. Additionally, the parents should also report this rental income in their own income tax return.

Abhishek Soni, CEO of Tax2Win.in explains that the Income Tax Act of 1961 does not include a specific requirement for the structure of a rent agreement. Nevertheless, as a common practice, rent agreements should contain specific clauses to ensure compliance with relevant income tax regulations, according to Soni.

Rent agreement for income tax purpose

A standard rental agreement typically includes essential information such as the names and addresses of both the tenant and the landlord. Soni suggests that it is advisable to include the PAN (Permanent Account Number) and Aadhaar number of both parties in the rent agreement. This inclusion helps in ensuring that the landlord’s PAN Card is available to the tenant for claiming HRA tax exemption from the employer, particularly if the annual rent exceeds Rs 1 lakh, even if the landlord declines to provide a copy of their PAN card.

For the rent agreement to hold legal validity, it should contain the signatures of witnesses, as well as those of the landlord and tenant. Additionally, obtaining notarisation is also recommended. Soni emphasises that the rent agreement should be prepared on stamp duty paper in accordance with the regulations of the state where the rented property is situated.

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Rent receipts need to be collected

Apart from possessing a rent agreement for claiming the HRA tax benefit, it is crucial for individuals to also collect rent receipts, as per the officials. These receipts serve as evidence of rent payments made to the landlord.

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