Salaried taxpayers who claim House Rent Allowance (HRA) for rent paid to close family members may soon have to reveal their relationship with the landlord under new proposed income-tax rules.
Mandatory Disclosure Under Draft Rules
Under the Draft Income Tax Rules, 2026, released with the transition to the Income Tax Act, 2025, individuals claiming HRA under the old tax regime must declare their relationship with the landlord in Form 124 if their total annual rent exceeds Rs 1 lakh.
The new framework will replace the Income-tax Act, 1961, starting April 1, 2026. This new disclosure requirement aims to prevent fake rental arrangements within families that people may use to lower their taxable income.
Taxpayers will need to specify whether the landlord is a spouse, parent, sibling, or another relative. They must also provide the landlord’s name, address, and PAN if the rent exceeds the set amount. Additionally, details confirming property ownership and actual residence will be necessary.
Cross-Verification Through Data Analytics
Renting a property from a spouse or parent is still legally allowed, as long as the transaction is real. The draft rules now include automated cross-verification methods to check these claims.
First, the relative who receives rent must report that income on their own income tax return. If there is a discrepancy between the tenant’s HRA claim and the landlord’s reported rental income, it could lead to scrutiny.
Second, authorities will look at the banking records. Rent payments made through official banking methods will help prove that the transaction is legitimate, while cash payments could draw more attention.
Third, ownership records will be checked to confirm that the relative actually owns the rented property.
Penalties for Misreporting
Failure to disclose the relationship or claiming HRA through “paper entries” could be seen as misreporting income. Under Section 439 of the Income Tax Act, 2025, which corresponds to existing Section 270A, penalties may reach up to 200% of the tax that is sought to be evaded.
AI-driven scrutiny systems are expected to identify discrepancies. This could lead to defective return notices and further assessment proceedings.