The deduction available is the least of the following amounts:
a. Actual HRA received;
b. 50% of [basic salary + DA] for those living in metro cities (40% for non-metros); or
c. Actual rent paid less 10% of basic salary + DA
We can understand the HRA calculation better with the following example:
Mr. Ram, employed in Mumbai, has taken up an accommodation on rent for which he pays a monthly rent of Rs 15,000 during the Financial Year (FY) 2017-18 i.e. Assessment Year(AY) 2018-19. He receives a Basic Salary of Rs 25,000 monthly along with DA of Rs. 2000, which forms a part of the salary. He also receives a HRA of Rs 1,00,000 from his employer during the year. Let us understand the HRA component that would be exempt from income tax during the FY 2017-18.
Therefore, in the above example, the entire HRA received from the employer is exempt from income tax.
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