How to claim HRA benefit by paying rent to your wife
Premium- The benefit can be claimed even if the husband is a co-applicant in the home loan
One way to avail tax benefits through house rent allowance (HRA) is to enter into a rent agreement with your wife. However, this arrangement needs to be made carefully to ensure the taxman doesn’t deny you the claim.
To begin with, let’s look at a recent decision given by the Delhi Tribunal in February in the case of Abhay Kumar Mittal vs. deputy commissioner of Income-Tax (I-T) wherein it was held that if the rent is paid to the wife and her income resources, including the rent income, are proved in the income tax return (ITR), then the benefit of HRA cannot be denied to a husband. Most importantly, the judgement pointed out that even if the property for which HRA is being claimed is majorly funded by the husband, the exemption cannot be denied.
“The contention that the husband cannot pay rent to the wife is devoid of any legal implication supporting any such contention," said the ruling.
However, claiming HRA through your spouse is not simple and taxpayers looking to claim this benefit should follow this checklist to fortify themselves against the risk of disallowance of HRA:
1. A legal rent agreement should be entered into with the wife, rent should be paid regularly and the wife should issue rent receipts to the husband. The taxpayer has to submit the rent agreement and rent receipts along with Form 12BB to his employer to claim HRA. Rent receipt should contain the tenant’s name, landlord’s name, rent amount, date of payment, rental period, house address, the signature of the landlord, PAN of landlord and revenue stamp if the rent is paid in cash above ₹5,000.
2. The house should not even be partially owned by the husband. The wife should be a legal owner.
3. The rent income should be declared in the ITR of the wife. It is advised that even if the wife falls below the basic exemption limit, she should still file ITR to prove the legitimacy of the arrangement.
4. To eliminate the risk of disallowance, the wife should have an independent source of income other than the rent received from the husband to substantiate the fact that the rent agreement entered into with the wife is not a colourable device to reduce the tax liability. Enquiries from the tax department can be expected in cases where the wife doesn’t have an independent income.
5. In the case where the house property owned by the wife is funded through a loan where the husband is a co-applicant, it is as good as giving a loan to a wife for repaying the bank loan. As mentioned in the case of Abhay Kumar Mittal, I-T rules do not restrict the husband from giving a loan to his wife. I will reiterate that the wife having some independent source of income will prove that the transactions are genuine and avoid litigation.
A similar issue was considered in the year 2013 by the Hon’ble Tribunal Ahmedabad in the case of Bajrag Prasad Ramdharani vs. Assistant Commissioner of Income Tax, wherein the husband was denied claim of HRA on the ground that husband and wife are living together in the capacity of landlord and tenant and the very fact that the landlord and tenant are staying together indicates that the whole arrangement is of the nature of the colourable device to reduce the tax liability. However, the assessee was allowed the claim of HRA as the twin conditions of section 10(13A) of the I-T Act, 1961, was satisfied that the house occupied by him is not owned by him and he is actually paying rent for such occupation. In such a scenario, HRA exemption cannot be denied.
Before deciding on this option, a couple should calculate their combined tax liability to gauge whether the arrangement reduces or increases their overall tax liability. This is especially valid where both the spouses fall in the same tax bracket.
Let’s take an example. A’s CTC is ₹20 lakh, in which the HRA component is ₹5 lakh and the rent is ₹3 lakh on annual basis. A will be able to take HRA benefit of ₹2 lakh and thereby, save tax of ₹62,400. If A’s wife also falls in the 30% tax slab, then her tax liability will increase by ₹65,520 (she will have to offer rental income of ₹2.1 lakh after availing the deduction of 30% of net annual value under section 24B of I-T Act, 1961) and the overall tax liability of the family will increase by ₹3,120.
Keval Sonecha is a partner at Sonecha & Amlani.