Renting From Relatives? Draft Income-Tax Rules Propose Disclosure Of Relationship With Landlord

If you're claiming House Rent Allowance (HRA) under the old tax regime for rent paid to family members like spouses, parents, or in-laws, you may soon have to disclose your "relationship with the landlord." The proposed changes to tax laws aim to verify the legitimacy of such claims. Notably, the Indian government has released official draft documents for a comprehensive overhaul of the tax system, primarily centered on the transition to the Income Tax Act, 2025, which is set to replace the 1961 framework on April 1, 2026.

Under the Draft Income Tax Rules, 2026, salaried individuals claiming House Rent Allowance (HRA) will now be required to disclose their "relationship with the landlord" in Form 124 if their aggregate rent exceeds Rs 1 lakh annually. This proposed change, which is part of the operationalization of the Income Tax Act, 2025, is intended to curb the use of fictitious family rent arrangements for tax evasion. 

Renting from Relatives

The draft rules introduce specific details that must be furnished to the employer:

• Relationship Status: Mandatory disclosure of whether the landlord is a spouse, parent, sibling, or other relative.
• Landlord Details: Name, address, and PAN (if rent exceeds Rs 1 lakh).
• Property Confirmation: Information to verify property ownership and actual residence.

Renting from a spouse or parent remains legal and permissible, provided the transaction is genuine. However, the new disclosure triggers automated cross-verification using data analytics to match:

• Landlord's ITR: The relative must report the rental income in their own tax filing.
• Banking Trail: Payments should be made through banking channels rather than cash to prove a real transfer of funds.
• Ownership Records: Verification that the relative actually owns the property being rented. 

Penalties for Misreporting

• Failure to disclose the relationship or claiming HRA through "paper entries" can be treated as misreporting of income. 
• Penalty Amount: Under Section 439 of the Income Tax Act, 2025 (and existing Section 270A), penalties can reach 200% of the tax sought to be evaded.
• ITR Scrutiny: AI-driven systems will flag discrepancies between the tenant's claim and the landlord's declared income, potentially leading to defective return notices.