⚠️ Proposed HRA Disclosure Rule – What Employees Should Know (Draft Income-tax Rules 2026)

Introduction

House Rent Allowance (HRA) is one of the most commonly claimed tax exemptions by salaried employees in India. It allows taxpayers to reduce their taxable income significantly, especially in metropolitan cities where rent forms a major portion of monthly expenses.

In the draft Income-tax Rules 2026, the government has proposed a new HRA disclosure requirement that could change how employees claim HRA exemptions. According to the proposal, employees claiming HRA may need to disclose their relationship with the landlord while submitting Form 12B to their employer.

This move is part of the government’s effort to curb misuse of HRA exemptions, particularly cases where rent is paid to relatives without proper documentation.

In this blog, we explain what the proposed HRA disclosure rule means, why it matters, how it affects taxpayers, and what you should do to stay compliant and tax-efficient.

What Is House Rent Allowance (HRA)?

House Rent Allowance (HRA) is a component of salary paid by employers to employees to cover rental accommodation expenses. Under Section 10(13A) of the Income-tax Act, 1961, employees can claim exemption on HRA subject to certain conditions.

The exempt portion of HRA is calculated as the least of the following:

Actual HRA received
Rent paid minus 10% of basic salary
50% of basic salary (for metro cities) or 40% (for non-metro cities)

To claim HRA, employees must provide rent receipts and landlord details to their employer.

What Is the Proposed HRA Disclosure Rule?

Under the Draft Income-tax Rules 2026, the government proposes that:

👉 Employees claiming HRA must disclose their relationship with the landlord while submitting Form 12B to their employer.

This disclosure is aimed at identifying cases where rent is paid to close relatives such as parents, spouse, siblings, or other family members, to verify whether the transaction is genuine.

Key Highlights of the Proposal

Disclosure of landlord relationship may become mandatory
Focus on rent paid to relatives
Increased scrutiny through data verification
Part of a broader move toward digital compliance and tax transparency

⚠️ Important: This is currently a draft proposal and not yet final. However, taxpayers should prepare for possible implementation.

Why Is the Government Introducing This Rule?

Over the years, HRA has been one of the most misused exemptions in India. Common misuse patterns include:

Fake rent receipts
Paying rent to relatives without actual transactions
Circular money transfers between family members
Claiming HRA while living in own house

The government is increasingly using data analytics, PAN-Aadhaar linking, bank data, and digital trails to detect such practices.

By requiring disclosure of the landlord’s relationship, tax authorities can:

Identify related-party rent transactions
Verify genuineness of rent payments
Prevent fake claims
Improve tax compliance and reduce evasion

Is Rent Paid to Relatives Still Allowed?

✅ Yes. Rent paid to relatives is still allowed.

There is no restriction in the Income-tax Act that prohibits paying rent to relatives such as parents. Many taxpayers legitimately pay rent to parents or family members who own property.

However, with the new proposal:

Such transactions may face higher scrutiny
Tax authorities may verify ownership, rental agreement, and bank transfers
Relatives receiving rent must declare rental income in their tax returns

What Is Form 12B?

Form 12B is a declaration form submitted by employees to employers when they join a new organization during the financial year. It contains details of:

Salary from previous employer
TDS deducted
HRA claimed
Other income and deductions

Under the proposed rule, landlord relationship disclosure may be added to Form 12B or similar employer reporting requirements.

How Will This Impact Salaried Employees?

1. Increased Documentation Requirements

Employees may need to maintain:

Rent agreement
Rent receipts
Bank transfer proof
Landlord PAN details
Disclosure of relationship with landlord

2. Higher Scrutiny for Family Rent Transactions

Rent paid to parents or relatives will likely be cross-verified with:

Property ownership records
Rental income declared by landlord
Bank transaction data

3. Reduced Scope for Fake Claims

Taxpayers using fake rent receipts without actual payments may face penalties and notices.

What Happens If You Make a Wrong HRA Claim?

Incorrect or fraudulent HRA claims can lead to:

Disallowance of exemption
Additional tax liability
Interest under Sections 234A/B/C
Penalties for misreporting or underreporting income
Income tax notices and scrutiny assessments

In serious cases, prosecution provisions can also apply.

How Should Employees Prepare?

✅ Maintain Proper Rent Agreement

Ensure you have a legally valid rent agreement mentioning:

Tenant and landlord details
Property address
Monthly rent
Tenure
Mode of payment

✅ Pay Rent Through Bank Channels

Avoid cash payments. Use:

Bank transfer
UPI
Cheque

This creates a verifiable audit trail.

✅ Keep Rent Receipts

Collect monthly or quarterly rent receipts signed by the landlord.

✅ Ensure Landlord Declares Rental Income

If rent is paid to relatives, ensure they declare rental income in their tax return. Otherwise, the transaction may be flagged.

✅ Avoid Inflated or Fake Rent Claims

Claim only genuine rent paid. Inflated rent to increase tax exemption can attract scrutiny.

Impact on Employers and Payroll Systems

Employers may need to update payroll systems to:

Collect landlord relationship data
Verify documentation
Report details in Form 16 or tax statements
Respond to tax department queries

This may increase compliance workload for HR and finance teams.

Benefits of the Proposed Rule

Although it may seem restrictive, the proposal has several benefits:

🔹 Improved Tax Transparency

Encourages genuine claims and reduces tax evasion.

🔹 Fair Tax System

Ensures honest taxpayers are not disadvantaged by fraudulent claims.

🔹 Digital Compliance

Supports India’s move toward a technology-driven tax system.

🔹 Better Revenue Collection

Helps the government plug revenue leakage and fund public welfare programs.

Challenges and Concerns for Taxpayers

⚠️ Privacy Concerns

Disclosure of family relationships may raise privacy issues among taxpayers.

⚠️ Compliance Burden

Small salaried taxpayers may find documentation and disclosures complex.

⚠️ Increased Scrutiny

Even genuine transactions may face additional verification, causing stress and delays.

Will This Rule Apply to the New Tax Regime?

Under the new tax regime (Section 115BAC), HRA exemption is not available.

Therefore:

Employees opting for the new tax regime cannot claim HRA
The proposed disclosure rule mainly impacts those under the old tax regime

Taxpayers should carefully compare both regimes before choosing.

Should You Switch to the New Tax Regime?

With increasing compliance in the old regime, some taxpayers may consider switching to the new regime. However, the decision depends on:

Salary structure
Rent amount
Deductions like 80C, 80D, home loan interest
Lifestyle and investments

Consult a tax expert before switching to avoid higher tax liability.

Expert Tips for Tax Planning Under HRA Rules

✔ Evaluate Rent vs Tax Benefit

Sometimes, paying high rent to save tax may not be financially beneficial. Calculate net savings.

✔ Consider Home Ownership

If rent is high and property prices are affordable, buying a house may be a better long-term investment.

✔ Use Professional Tax Planning

A tax consultant can help structure salary, deductions, and investments legally to minimize tax.

What Taxla Services Recommends

At Taxla Services, we recommend:

Maintain full documentation for HRA claims
Avoid aggressive or fake tax planning practices
Use bank transfers for all rent payments
Seek professional advice for salary structuring and tax regime selection
Stay updated with Budget and Income-tax rule changes

Being proactive today can save you from tax notices tomorrow.

Conclusion

The Proposed HRA Disclosure Rule in Draft Income-tax Rules 2026 marks a significant step toward transparency and accountability in India’s tax system. While rent paid to relatives is still allowed, the government aims to ensure such claims are genuine and properly documented.

Employees should not panic but instead prepare by maintaining proper agreements, payment records, and compliance. As tax laws evolve, staying informed and planning wisely is the key to maximizing tax benefits while staying compliant.

For personalized tax planning, HRA optimization, and return filing support, consult a qualified tax professional.

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