Paying Rent to Family? Here’s How to Stay Out of the Income Tax Department’s Radar in FY 2025-26

Paying rent to your parents or other relatives and claiming House Rent Allowance (HRA) sounds simple but it’s become a hot topic for the income tax department. With several taxpayers receiving notices recently, it’s clear the I-T department is tightening scrutiny on rent claims, especially when close relatives are involved.

So how can you protect your legitimate HRA claims this year without falling into compliance traps? Here’s a complete explainer, including a key update on cash rent payments and what’s changed from April 1, 2025.

Why Are You Getting Tax Notices?

In recent months, tax authorities have flagged HRA claims where:

• No rent agreement exists

• Rent was paid in cash without receipts

• No TDS was deducted when required (rent > ₹50,000/month)

Even if your claim is legitimate, failing to provide documentary proof could lead to rejection or a demand for clarification.

How to Make Your HRA Claim Bulletproof

1. Always Get a Rent Agreement (If Possible)

Even if the landlord is your parent or relative, get a simple, signed rent agreement with rent amount and terms.

2. Prefer Digital Transfers

Bank or UPI transfers leave a clear audit trail. If you’re paying in cash, ensure you have signed receipts.

3. Deduct 2% TDS 

If you’re paying more than ₹50,000 per month in rent, you must deduct TDS at 2% and deposit it with the government using Form 26QC.

Can I Claim HRA If Rent Was Paid in Cash?

Yes, you can still claim HRA on rent paid in cash, but only under certain conditions:

• You have signed rent receipts, and

• Your landlord declares the rent as income in their ITR.

What Changed in FY 2025-26? Key Tax Updates You Should Know

1. New Tax Regime is Now Default

Taxpayers will be auto-enrolled in the new regime unless they opt out. But remember—HRA exemptions are only allowed under the old regime.

2. New Income Tax Slabs (FY 2025-26)

The updated new income tax regime brings significant changes, including a higher tax rate for incomes above ₹24 lakh, which will now be taxed at 30%, compared to the previous threshold of ₹15 lakh. Check new income tax slab below.

3. No Tax for Salaried Individuals Earning Up to ₹12.75 Lakh

In an important update for salaried individuals, those earning a taxable income up to ₹12 lakh (₹12.75 lakh for certain individuals) will not have to pay any tax under the new regime, provided they opt for this tax structure in FY 2025-26. For salaried individuals earning up to ₹12.75 lakh, there will be no tax with a ₹75,000 standard deduction.

Read More: ITR Filing: 6 Ways the New Tax Regime Can Help You Save More in FY2024- 25.

Conclusion

Paying rent to family members and claiming HRA can be a straightforward process, but the increasing scrutiny by the Income Tax Department requires taxpayers to be extra cautious.

To avoid unnecessary tax notices and ensure that your HRA claim is legitimate, always maintain proper documentation, such as signed rent agreements, receipts, and, where applicable, TDS deductions. Digital payment methods are preferred, as they provide an easy-to-trace audit trail.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.