HRA is given to an employee when he/she lives in rented residential premises. Contrary to popular perceptions, HRA is neither fully taxable nor fully non-taxable. Income Tax Act Section 10(13A) provides for HRA tax exemption. The tax deduction will be the lowest of the following, ie, following would be the exempt part of HRA while the rest of HRA gets added to your income.:
HRA received.
50% of the salary if living in any of Metro cities of India. Otherwise 40%.
Actual rent paid minus 10 % of salary.
Salary here includes Basic, DA, MSP and any commissions received.
Self-employed or salaried, who do not get HRA, can claim exemption of tax on rent paid in excess of 10% of his/her income or salary with upper ceiling of 25% under Section 80GG subject to a maximum of Rs 5000 exemption per month.