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HRA to Dad to pay my Edu loan

01 July 2021

Hi CA Rockstars!

A quick tricky questions for you. I have an Edu loan. My father is the gauranter, so he has the loan too (theoretically).

While working from home nowadays, I'm paying my rent to dad (₹20k per month deposit in his account). What if he decides to put that ₹20k monthly in paying the Edu loan that is being visible in his account (since he is the gauranter, the loan amount actually shows in his account too).

Am I or Dad playing it right? Any wrongdoing or any future problem that these transactions could create for us?

Let me know.

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6 Replies

CA Raj Doshi (Practising CA) (8723 Points)
Replied 01 July 2021

Whoever is earning higher income should pay the loan and claim interest deduction under 80E. Guarantor and Borrower are separate. Generally, parents are coborrower in educational loan.

You can pay rent to dad and dad can pay off the loan but whether you are doing tax efficiently depends on your net income numbers.

Also, the genuineness of the rent transaction needs to be proved in worst case scenario.

Generally, paying off the education Loan directly would be more tax efficient to the best of my experience but ofcourse actual numbers will give the final outcome.

veerendar singh (tax consultant) (3301 Points)
Replied 01 July 2021

There isnt any major problem in this arrangement.
due care must be taken while filing returns. Raj ji has pointed it out rightly. you have to consider the tax positions of both father and son and present the transaction in the way which makes most sense in the light of such tax positions.

Chanchal Halder (5 Points)
Replied 01 July 2021

Thanks, Veerendar Sir,

Yes, your points are very well-thought and valid. I have a higher salary right now as my dad is retired now. I am doing both HRA and Edu Loan (the interest part also) to reduce my taxable income. My dad's taxable income is not a concern here.

My doubt is. Isn't it looking very obvious as to why am I paying the HRA to my dad(to reduce my Edu loan)? Is it a loophole in the tax system that I have discovered? Or do the tax department have any specific rule/regulations for the particular scenario that I am not aware of?

Thanks in advance!

Chanchal Halder (5 Points)
Replied 01 July 2021

Thanks, Joshi Sir

Absolutely agree with your thought process. You corrected my mistake - he is a co-borrower and not a guarantor.

I am employed for 2 years and am trying to maintain a balance to reduce my taxable income. My dad is retired, and his primary income, if any, is not on books/records (except for his pension).

I am reducing my taxable income by giving HRA (INR 190k reduction in taxable income) and Edu loan (80E - 75k reduction in Edu loan). I have figured that doing both would reduce my taxable income greatly. My dad's taxable income is taken care of and will not be that huge.

My doubt is. Isn't it looking very obvious as to why am I paying the HRA to my dad(to reduce my Edu loan)? Is it a loophole in the tax system that I have discovered? Or do the tax department have any specific rules/regulations for the particular scenario that I am not aware of?

Thanks in Advance!

CA Raj Doshi (Practising CA) (8723 Points)
Replied 01 July 2021

A rental agreement to support your claim would work. Ofcourse the rent should be reasonable. There is nothing wrong in pay rent to your father as he is owning the property.

It's an effective tax planning thing and nothing to do with loophole.

veerendar singh (tax consultant) (3301 Points)
Replied 01 July 2021

There isnt any provision under the salary head of income for payments to related persons in excess of regular market price. however this does not mean that one would pay 1 lakh per month rent for a small house. i think some degree of reasonableness with respect to rent amount is required. in your case you are paying 20K per month. compare this with your house rent allowance. if your allowance is only 15K then it may raise a suspicion that why are you paying more than the amount of allowance. you can always argue if such query arises.
but to be on a safer side i would say that rent amount and allowance amount should be in proximity.

secondly, regarding the loop hole i think there is nothing wrong or nefarious if your father settles your loan in gratis. all such absurd arrangements are fine until there is a specific provision which directly targets such loophole.

second thought: i wonder if you should get exemption under 10.13A for hra as you havent actually incurred the expense. you have indirectly received the amount back in a different form.

but in the end i always say this: the test of right and wrong will be done only if your return is selected for scrutiny. and for salaried individual earning below 10L the chances of receiving notice from department is near to zero.