Paying rent to parents or close relatives has long been recognised as a legitimate tax-planning strategy, provided the arrangement is genuine and backed by proper documentation. Many salaried employees use such arrangements to legally claim deductions for House Rent Allowance (HRA).
But will the proposed Income Tax Draft Rules, 2026, make such claims illegal? In simple terms, can a salaried employee continue to treat parents, in-laws or even a spouse as a landlord or will such arrangements now attract scrutiny?
The draft rules 2026 introduce a key compliance change by mandating disclosure of the ‘relationship with the landlord’ in Form No. 124, a move aimed at curbing tax evasion rather than prohibiting genuine rental arrangements.
Salaried taxpayers should note that Draft Rule 205 does not prohibit paying rent to relatives. Renting a house from parents, a spouse, or other family members remains a valid tax-planning arrangement, provided the tenancy is genuine, supported by a formal rental agreement, rent payments are made through banking channels, and the landlord properly discloses rental income on their tax return, experts say.
Consider the example of Ananya Sharma, a 35-year-old marketing professional in Pune. She lives in an apartment owned by her mother and pays ₹30,000 in rent per month. She claims HRA exemption under Section 10(13A) read with Rule 2A. The arrangement is supported by a formal rental agreement, monthly bank transfers, and rent receipts, while her mother reports the rental income on her income tax return.
With Draft Rule 205 introduced as part of the Central Board of Direct Taxes’ rollout, Ananya must now disclose her relationship with the landlord in Form 12BA. The rule does not prohibit renting from parents. However, it increases transparency and scrutiny.
Since the rent is genuinely paid, aligned with local market rates, and properly reported by both parties, her HRA claim remains valid. The new requirement simply ensures that related-party arrangements are substantiated and not used as tax avoidance devices.
Disclosure requirements raise compliance bar, not a legal ban
The Draft Income-tax Rules, 2026, issued as part of the rollout of the Income-tax Act, 2025, by the Central Board of Direct Taxes, signal a notable shift in the mechanics of HRA claims. While the extension of the 50% deduction to cities like Bengaluru, Ahmedabad, Pune, and Hyderabad has been discussed, an element in the draft rule 2025 is also a matter that needs to be taken into consideration.
The new rule says that, apart from mentioning the landlord’s PAN number, if the rent exceeds a certain limit, the ‘relationship with the landlord’ must also be disclosed.
Will paying rent to parents or relatives still qualify for tax deductions under the draft income tax rules?
“Draft Rule 205 does not make paying rent to relatives illegal. Renting from parents, spouses, or other family members remains a perfectly legitimate tax-planning arrangement under the law, provided the transaction is genuine. The rule is simply designed to bring these transactions out of the shadows and ensure they are reported consistently by both the tenant and the landlord,” says Rohit Jain, Managing Partner, Singhania & Co.
So, the Draft Rule 205, in its true legal character and practical effect, does not impose any statutory prohibition or embargo upon salaried employees paying rent to relatives for the purpose of availing exemption under Section 10(13A) of the Income-tax Act, 1961, read with Rule 2A of the Income-tax Rules, 1962.
“Instead, it constitutes a calibrated transparency and disclosure measure intended to fortify the integrity of tax administration by mandating explicit declaration of the landlord-tenant relationship in Form 12BA. This enables employers and, more significantly, the Income-tax Department to identify and examine related-party rent arrangements with greater precision and vigilance,” says Tushar Kumar, Advocate, Supreme Court of India.
The requirement of such disclosure is, therefore, a clear legislative signal of enhanced scrutiny rather than substantive disqualification. “It aligns with the settled legal principle that while tenancy between relatives is perfectly lawful and permissible, the same must withstand the test of genuineness, commercial substance, and actual payment, and must not be a mere colourable device for tax avoidance,” says Kumar.
Genuine claims protected, artificial ones penalised
Concomitantly, the explicit reporting framework materially raises the compliance threshold and, correspondingly, increases exposure to penalties under Section 270A in cases where claims constitute under-reporting or misreporting of income. This is particularly relevant where rent is fictitious, circular, unsubstantiated, or not duly offered to tax in the hands of the recipient landlord.
Under Section 270A of the Income-tax Act, 1961, the penalty is 50 per cent of the tax payable on under-reported income and can rise to 200 per cent of the tax payable in cases of misreporting.
“However, it must be stated with equal clarity and authority that in bona fide arrangements, where rent is genuinely paid, properly documented, aligned with market realities, and duly disclosed by the recipient in their tax returns, the exemption remains fully tenable in law and defensible upon scrutiny,” says Kumar.
Thus, the true import of Draft Rule 205 is not to extinguish legitimate family-based tenancy arrangements but to usher in a regime of heightened accountability, evidentiary discipline, and substantive compliance, ensuring that only genuine claims withstand regulatory examination while artificial constructs are effectively deterred.
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics
