Salaried employees claiming HRA may soon face tighter disclosure norms under the Draft Income-tax Rules, 2026. The CBDT has proposed that tenants must now disclose their relationship with the landlord in the new HRA form, a move that could bring rent paid to parents and other relatives under sharper tax scrutiny, with possible TDS implications and penalty risks.
New HRA claim rules under Income-tax Act 2025: Rent paid to relatives to face tax scrutiny (AI-generated illustration for representational purposes)
Salaried employees claiming House Rent Allowance (HRA) may soon have to provide more detailed disclosures while filing tax declarations.
Under the Draft Income-tax Rules, 2026, framed to operationalise the Income-tax Act, 2025, the Central Board of Direct Taxes (CBDT) has proposed a key change — tenants will now have to disclose their relationship with the landlord in the prescribed HRA declaration form.
The move could significantly impact rent arrangements within families, especially where rent is paid to parents, in-laws or even a spouse.
As the government rolls out the new tax framework from April 2026, much of the attention has been on the expansion of the 50% HRA exemption bracket to more cities such as Ahmedabad, Bengaluru, Pune and Hyderabad.
However, tax experts say a more consequential change lies in Draft Rule 205, read with the proposed Form No. 124 (which replaces the earlier Form 12BB used for salary declarations).
What is changing in HRA claims?
Under the current system, salaried employees claiming HRA are required to provide rent receipts and, where annual rent exceeds the prescribed limit, furnish the landlord’s PAN. The draft rules now go a step further. Employees will have to disclose the “relationship with the landlord, if any.”
At first glance, this may appear to be a minor compliance addition. But tax professionals say it could materially alter how intra-family rent arrangements are examined by the Income Tax Department.
Why the new disclosure matters
Paying rent to parents is a common and legitimate tax planning practice. Many salaried individuals live in property owned by their parents and claim HRA while the parents declare rental income in their tax returns.
Until now, as long as there was a valid rent agreement, payments were made regularly, the landlord declared rental income, the arrangement was generally accepted.
However, with the introduction of a mandatory “relationship” column, the tax department will have a structured data point to identify related-party rental arrangements at scale.
This makes it easier for authorities to use analytics to cross-verify:
Income matching: Whether the landlord has declared the rental income in their Income Tax Return and Annual Information Statement (AIS).
Property ownership check: Whether the declared landlord actually owns the property.
Banking trail verification: Whether rent is being paid through proper banking channels.
What was earlier difficult to detect systematically could now become algorithmically visible.
Rent paid to relatives may be treated as formal rent
The draft rules also clarify a broader issue — rent paid to close relatives such as parents, in-laws or a spouse may still qualify as “rent” under tax law if the arrangement reflects a genuine lease with documented terms.
This has implications under Section 194-I, which deals with Tax Deducted at Source (TDS) on rent beyond specified thresholds.
If the rent crosses the applicable limit, the tenant may be required to deduct TDS. The relative receiving rent could be treated as a landlord for tax purposes.
Failure to comply may attract penalties.
The intention, according to tax experts, is to plug loopholes where intra-family arrangements are used to artificially reduce tax liability or divert income without proper tax reporting.
Higher scrutiny and penalty risks
Another important angle is litigation exposure. Under Section 270A, misreporting of income can attract penalties of up to 200% of the tax payable. With the introduction of a specific disclosure field for “relationship with landlord,” it may become harder for taxpayers to argue that an incorrect claim was an oversight.
If the department finds that the landlord did not declare rental income, the property does not belong to the declared landlord or the arrangement was merely notional, the risk of penalties increases.
What taxpayers should do
If the draft rules are finalised in their present form, salaried taxpayers paying rent to relatives should tighten compliance. Experts suggest:
Execute a formal rent agreement with clear terms and rental value.
Route rent payments only through banking channels — avoid cash transactions.
Ensure the landlord declares rental income in their ITR.
Maintain documentation, including ownership proof and payment records.
Check whether TDS obligations apply under Section 194-I.
Informal or loosely documented family arrangements may become increasingly difficult to defend.
Why this shift is significant
The proposed changes reflect a broader transition in tax administration — from declaration-based compliance to data-driven verification.
For genuine taxpayers, this may simply mean additional paperwork. But for those using aggressive or engineered HRA structures, the new rules signal elevated scrutiny and possible disputes.
The CBDT has invited public comments on the draft rules, and the final version may be refined after stakeholder feedback. Until then, salaried employees — especially those paying rent within the family — may need to reassess their HRA planning strategy.
The larger question remains: Will the new disclosure streamline compliance and plug revenue leakages, or will it open the door to fresh litigation in routine family arrangements? The answer may become clear once the final rules are notified.
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