How to save Unused HRA exemption

Dear, I am drawing Rs. 35000/- in HRA which is 50% of my Basic pay. Since the HRA exemption goes unused as i am paying monthly rent only Rs. 12500/-. My Father is 80 Years old retired with income of Rs. 17000 pm pension and has now enhanced tax exemption limit. In am effort to save my tax I intend to do following. My father will buy a Studio Apartment and rent it to me at a phenomenal rate of Rs, 45000 per month through a rent agreement. I shall pay him by cheques and he will take the tax exemption. He will invest this phenomenal amount paid by me in FDs for Sr. Citizens in his name and gift the proceeds back to me. Can I save tax this way ? is there any upper limit for charging Rent ? Is there any simple method by which HRA exemption can be saved ?
Asked 1 year ago in Income Tax from Ahmedabad, Gujarat
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Shyam Sunder Modani
CA, Hyderabad
955 Answers
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  Talk to Shyam Sunder Modani
There is hairline difference between tax planning and tax arrangements intended to avoid tax liability. You can have tax planning in such a way that you do not cross the limit of reasonableness, which is a matter of facts in the given circumstances. 

In your specific case, you can have the tax planning by taking the studio apartment on lease from your father and save taxes by way of claiming HRA. However, if the rent is beyond the reasonable limits for the type of accommodation, you get into an arrangement to avoid tax liability in ostensibly legally structured agreements. You may then get into problems with tax authorities. So as long as you can keep the rent at justifiable levels, there is no problem.

There need not be cause and effect relationship for making gifts to you out of rental income earned by him. Hence, if he gifts you money, it need not be linked to the lease rentals paid by you, as long as the lease rentals are justifiable. 

Hence, the simple method is to pay only justifiable rent to your father and claim HRA.
B Vijaya Kumar
CA, Hyderabad
290 Answers
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It is a good idea to avail higher exemption under section 10 (13A) of Income Tax Act, towards House Rent Allowance, by paying a rent of Rs 45,000/- for a studio apartment.  However I advise you to take caution that normal rental value of the said apartment in that area should be in the range of Rs 45,000/- otherwise, if the income tax department finds that rent paid is excessive, then in that case, then they might reduce eligible amount of rent to fair value and correspondingly reduce the exemption u/s 10(13A). And whatever you have stated about gifting the said amount to you should never be mentioned to anybody. There is no upper limit for rent to be charged, but it should a normal rent. Further, you may avail housing loan in the name of your wife and your Huf buy or construct a house and take it on lease for claiming exemption and also creating a house property in the name of wife and huf out of payment of rent.
Vijay N. Kale
CA, Hyderabad
248 Answers
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sounds interesting . Section 10(13A) read with rule 2A talks about the deduction in respect of HRA .  The deduction for Ahemdabad  will be the least of the followings - Actual rent paid , rent in excess of 105 of salary and 40% of salary .  The deduction is allowed only if the assessee has actually paid the rent . Further if the rent is more than Rs 100000/ PA , the assessee has submitt the PAN no of the landlord to the employer .

Following the above , you may try the above , provided the AO does not take a adverse view on any of the issue .
Prakash Sinha
CA, Delhi
112 Answers
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Apart from ethical issues, it always makes commercial sense to comply with legal formalities, as the cost of non compliance is high both in monetary and non monetary terms.
B Vijaya Kumar
CA, Hyderabad
290 Answers
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