The New HRA Rule: Navigating Draft Income Tax Rules 2026 and Form 124
For decades, House Rent Allowance (HRA) has been a cornerstone of tax planning for salaried employees in India. However, the era of simple self-declarations is rapidly evolving into an era of granular transparency. The Central Board of Direct Taxes (CBDT) has proposed the Draft Income Tax Rules 2026, which signal a significant tightening of the verification process for HRA claims. The most striking change is the introduction of Form 124, which requires taxpayers to disclose their relationship with their landlord.
As a Chartered Accountant, I have observed that while the law always required ‘actual’ payment of rent, the enforcement was often relaxed. These new rules are designed to bridge that gap, ensuring that HRA exemptions are claimed only for genuine rental arrangements. Whether you are an employee or a professional, understanding these shifts is non-negotiable for the upcoming assessment years.
Understanding the Major Shift: Form 124 and Relationship Disclosure
The crux of the Draft Income Tax Rules 2026 lies in the enhanced reporting requirements. Previously, employees submitted Form 12BB to their employers, providing details of rent paid, along with the landlord’s name, address, and PAN (if the annual rent exceeded ₹1 lakh). The proposed changes take this a step further by introducing Form 124.
The Relationship Clause
The most significant addition in Form 124 is the mandatory disclosure of whether the landlord is a ‘related party.’ This is specifically aimed at taxpayers who pay rent to parents, spouses, or other close relatives. While paying rent to a relative is not illegal, it has long been a red flag for the Income Tax Department if not backed by evidence. By requiring a formal disclosure of the relationship, the department can now use automated data processing to cross-verify if the landlord has reported that rental income in their own tax returns.
Verification and Cross-Linking
With the integration of the Annual Information Statement (AIS) and Taxpayer Information Summary (TIS), the department is now equipped to match the HRA claim of an employee with the rental income of a landlord almost instantaneously. If you disclose a relationship in Form 124, you can expect a higher level of scrutiny regarding the ‘commerciality’ of the transaction.
The Impact on Salaried Employees and Professionals
The introduction of these rules isn’t just about extra paperwork; it’s about a fundamental shift in how tax compliance is handled at the source. Employers will now be under greater pressure to ensure that the declarations they receive via Form 124 are consistent and complete.
Stricter Employer Verification
Employers may no longer accept a mere rent receipt as sufficient proof. Given the potential for penalties on the employer for short-deduction of TDS if a claim is found to be fraudulent, many HR and Finance departments are likely to request registered rent agreements and proof of financial transactions (such as bank statements) to validate the claims made in Form 124.
Risks for Professionals
While the focus is often on the salaried class, professionals claiming rent as a business expense under Section 37 or 80GG must also be wary. The spirit of the Draft Rules 2026 suggests that the department will apply similar logic to all taxpayers. If you are a professional operating from a rented premise owned by a relative, the disclosure of that relationship is now a critical compliance milestone.
How to Claim HRA Safely: Best Practices Under the New Regime
Transitioning to the new rules doesn’t mean you should stop claiming legitimate exemptions. It simply means you must be more diligent. Here is a checklist to ensure your HRA claims remain safe from litigation and penalties:
- Execute a Formal Rent Agreement: Even if you are paying rent to your parents, have a written agreement in place that outlines the monthly rent, the duration of the stay, and the responsibilities of both parties.
- Transfers via Banking Channels: Avoid cash payments. Pay your rent through UPI, NEFT, or Cheque. This creates an electronic trail that is indisputable during a scrutiny assessment.
- Ensure the Landlord Files Taxes: If you are claiming an HRA exemption, ensure your landlord is declaring that rent as ‘Income from House Property’ in their Income Tax Return (ITR). A mismatch here is the fastest way to receive a tax notice.
- Maintain Utility Bills: Keep copies of electricity bills or water bills in the name of the landlord for the premises you are occupying to prove the physical occupancy of the property.
- Address Consistency: Ensure that the address on your rent receipts matches the address mentioned in your Form 124 and your own Aadhaar/Voter ID if possible.
The Draft Income Tax Rules 2026 represent a move toward a more transparent, digital-first tax ecosystem. By preparing for the implementation of Form 124 today, you can avoid the stress of penalties and rejected claims tomorrow. As always, when in doubt, consult with a tax professional to ensure your specific situation is compliant with the latest notifications.