Paying Rent to Parents or Spouse to Save Tax? Follow This Rule or Face 200% Penalty

Big change in house rent allowance rules. Under the draft Income Tax Rules, 2026, employees will have to clearly disclose their relationship with the landlord. Especially when the rent is paid to parents, spouse, siblings or other relatives.

The change is part of the new Income Tax Act, 2025 framework, which will come into effect from April 1. The move aims to prevent misuse of HRA (House Rent Allowance) through fake rent receipts or informal arrangements.

Relationship disclosure mandatory

Till now, rent receipts and the landlord’s PAN were the main requirements for employees to claim HRA. The new law makes this rule even stricter. If the total rent paid in a year exceeds Rs 1 lakh, taxpayers will have to declare not only the name, address and PAN number of the landlord but also their exact relationship with the landlord in a prescribed form.

This means that taxpayers will have to clearly state whether the rent is being paid to parents, spouse, siblings or any other relative. The tax department wants transparency in the family-based rental system, which is often used for tax planning.

Authorities to monitor real rental systems

The government has not banned the practice of renting to family members. Such arrangements are legal and valid. However, tax authorities now expect proper documentation and clear receipts.

In practice, there should be a formal rental agreement and payments should be made through bank transfers rather than cash. Equally important, the landlord or the family member receiving the rent will have to declare the money as rental income in their own income tax returns. This helps ensure that the transaction is genuine and not just a tax dodge.

Income tax department officials say that the focus is now shifting from showing rent receipts to checking whether the rent is in line with reasonable market rates.

Penalties for concealing information or misreporting

Taxpayers who fail to disclose their relationship with the landlord or make false claims can face serious consequences. If the tax department finds that the rent claim is incorrect or unsubstantiated, it may be treated as a misreporting of income.

Under the new income tax law, a penalty of up to 200 percent of the tax wrongly evaded, along with interest and a potential tax notice, can be imposed. Taxpayers may also receive a notice if there is a discrepancy between the rent claimed and the income reported by the landlord.

What this means for salaried employees

The upcoming changes mean that salaried individuals claiming HRA, especially when paying rent to family members, will have to keep proper records and ensure full disclosure. With robust reporting and fact-checking, incomplete or informal arrangements can no longer pass scrutiny.

For many taxpayers, this is a wake-up call to review their HRA claims and make sure everything is correct before the new rules come into effect in April 2026.