As the CBDT prepares to operationalise the Income-tax Act, 2025, the Draft Income-tax Rules, 2026 introduce a procedural change that could materially alter how salaried employees claim HRA
While public attention has largely focused on the expansion of the 50 percent HRA bracket to cities such as Ahmedabad, Bengaluru, Pune and Hyderabad, a more consequential development lies embedded in Draft Rule 205
> The New Disclosure Requirement
Historically, employees claiming HRA were required to furnish the landlord’s Permanent Account Number where annual rent exceeded the prescribed limit
Draft Rule 205, read with proposed Form No. 124 (earlier Form 12BB), now mandates disclosure of the “relationship with the landlord, if any.”
This is not a minor compliance addition.
It creates a structured data point enabling the tax administration to systematically identify related-party rental arrangements across salaried taxpayers.
> Why This Disclosure Changes the Risk Equation
Rent paid to parents or other relatives has long been a legitimate tax planning arrangement, provided transaction was genuine and properly documented.
The mandatory disclosure of relationship now acts as a direct trigger for deeper scrutiny.
With explicit relationship mapping, the Department can deploy analytics to cross-verify:
a. Income matching: Whether the rental income is reflected in the relative’s AIS and Income Tax Return.
b. Property ownership validation: Whether the declared landlord actually owns the property.
c. Flow of funds verification: Whether rent payments are consistently routed through banking channels.
What was previously difficult to detect at scale now becomes algorithmically visible.
> The Litigation Exposure
Under Sec. 270A, misreporting of income may attract penalties of up to 200 percent of the tax.
By introducing a dedicated and mandatory column for “relationship,” Draft Rule 205 significantly weakens any defence of oversight or inadvertence in cases involving artificial family rental claims.
This is clearly designed as an enforcement trigger.
> Practical Considerations for Salaried Taxpayers-
As implementation approaches, taxpayers paying rent to relatives should consider the following:
A. Execute a formal rent agreement.
B. Route all rent payments exclusively through banking channels.
C. Ensure consistent declaration of rental income by the landlord.
D. Maintain complete documentation and payment trails.
Informal arrangements will increasingly become difficult to defend.
Draft Rules 2026 illustrate a broader transition in tax administration:
From declaration-based compliance
To data-driven verification.
For compliant taxpayers, this is a procedural tightening.
For aggressive or engineered HRA structures, it signals elevated scrutiny and potential litigation.
The larger question is whether this will streamline genuine compliance or generate new disputes.
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