HRA Claims: Disclosure of Landlord Relationship to Become Mandatory Under New Draft Tax Rules

In a significant move aimed at plugging revenue leakages and preventing misuse of House Rent Allowance (HRA) benefits, the Draft Income-tax Rules, 2026 propose a stricter compliance framework for salaried individuals paying rent to relatives. The proposed amendments introduce a mandatory disclosure requirement that could materially alter how “family rental arrangements” are scrutinized by tax authorities.

Mandatory Declaration in Form 124

Under Draft Rule 205, employees claiming HRA will now be required to explicitly disclose their “relationship with the landlord” in Form No. 124. The measure is specifically targeted at cases where rent is paid to close relatives — arrangements that have often attracted suspicion of being structured primarily to secure tax advantages rather than reflecting genuine tenancy transactions.

The government’s objective is to introduce greater transparency into such claims and enable deeper data-driven verification. By mandating this disclosure, the tax department will be able to cross-check rental payments against the landlord’s income tax returns, property ownership records, and financial disclosures to assess authenticity.

Focus on Analytics and Cross-Verification

The new framework reflects the increasing reliance on data analytics in tax administration. Once the relationship is disclosed, authorities can algorithmically match:

Whether the landlord actually owns the property in question;
Whether rental income has been duly reported by the landlord;
Whether the financial capacity and transaction trail support the claimed rent payments.

This step is expected to discourage artificial arrangements where rent is shown as paid to parents, spouses, or other relatives without genuine transfer of funds or declaration of income.

Steep Penalties for Misreporting

The proposed rules carry significant consequences for inaccurate reporting. Any misrepresentation or suppression of facts may attract penalty proceedings under Section 270A of the Income-tax Act. In cases categorized as “misreporting of income,” the penalty can extend up to 200% of the tax payable on the under-reported amount.

Importantly, the mandatory disclosure requirement weakens the commonly used defense of ignorance or inadvertent omission. Once the relationship column is explicitly required in the prescribed form, failure to disclose or deliberate misstatement could be viewed as a conscious act.

Genuine Family Rentals Still Permissible

Tax professionals clarify that paying rent to relatives is not prohibited under law. However, the transaction must be bona fide. To withstand scrutiny, taxpayers should ensure: a properly executed rental agreement; actual transfer of rent through traceable banking channels; reasonable rent consistent with market rates; and declaration of rental income by the landlord in their income tax return.

Where these conditions are met and documentation is maintained, legitimate claims should remain defensible even under the enhanced compliance regime.