New Income Tax Rules 2026: HRA Claims Under Scrutiny If You Pay Rent to Relatives

Finance influencer CA Sarthak Ahuja shares a crucial update for salaried taxpayers claiming HRA, especially those who pay rent to relatives to optimize their tax benefits. A new draft rule under the Income Tax Rules 2026, proposed to take effect from 1 April 2026, tightens compliance requirements and increases scrutiny for such arrangements. Here's a detailed feature explaining what's coming and how you should prepare.

What Is Changing?

From the next financial year, employees claiming House Rent Allowance (HRA) will have to submit a new document, Form 124, to their employers if their annual rent exceeds ₹1 lakh, or roughly ₹8,300 per month.

This form goes far beyond simple rent receipts. Employees will now be required to disclose:

• Whether rent is being paid to a relative
• The relationship with the landlord
• Landlord's full name and PAN

Relatives include parents, siblings, spouse, and in-laws. Common cases where people claim HRA.

Why This Matters:

The tax department plans to use backend data matching to verify whether the rent claim is genuine or merely a tax-saving tactic. Authorities are expected to check:

1. Fair Market Rent

Is the rent amount reasonable for the locality, or artificially inflated to maximise HRA exemption?

2. Ownership Verification

Does the relative actually own the property?

Cases where rent is paid to a parent but the house is in the name of another family member will get flagged.

3. Banking Transactions

Was rent paid monthly through banking channels, or transferred only once at year-end for documentation?

4. Proper Documentation

Authorities will check for:

• A valid rent agreement
• Monthly rent receipts
• Continuous rent payments

5. Income Reporting by the Landlord

Has your relative declared the rent as income and paid tax on it? Non-reporting creates a mismatch that triggers scrutiny.

Possible Consequences

If the tax department finds inconsistencies or believes the arrangement is not bona fide, the taxpayer may receive scrutiny notices.
Additionally, penalties may go as high as 200% of the tax amount if the rent arrangement is ruled ingenuine.

What Should Taxpayers Do?

As the rule is still in draft stage but likely to be implemented, taxpayers should:

• Ensure the rent agreement is legitimate
• Pay rent monthly via bank
• Match rent with fair market values
• Confirm the landlord reports rental income
• Keep all documents updated

This proposed rule signals the government's push for tighter compliance, so it's best to fix any gaps now rather than face scrutiny later.

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