House Rent Allowance (HRA): Sec 10(13A)
HRA is an allowance granted by employers to their employees towards payment of their rental expenditure. It forms a part of employee’s salary. However, not necessarily the whole of it is taxed.

Least of the following is exempt u/s 10(13A):
A) 40% or 50% of salary for the relevant period
B) Actual amount of HRA received for the relevant period
C) Rent paid (less) 10% of salary for the relevant period

Here, Salary is restricted to:
Basic salary
+ D.A drawn (if considered for retirement benefits only)
+ Commission based on a fixed percentage of Turnover.
50% is applicable if the residence is in metro cities of Mumbai, Delhi, Chennai, Kolkata.
40%, incase of other places in India.
Relevant period means the period during which the said accommodation was occupied by the employee(assessee) during the Previous Year.

The above exemption is not available if:
Assessee stays in his own house, or
Doesn't receive HRA component, or
Doesn't incur rental expenditure. i.e does not pay rent.

It is mandatory for employee to report PAN of the landlord to the employer if rent paid is more than Rs.1,00,000.

If you do not receive HRA as a part of your salary, you can still claim upto Rs 60,000 (per annum) deduction under Section 80GG.

Individuals/HUF paying monthly rent to a Resident in excess of Rs. 50,000 are liable to deduct TDS @5%.

Tenants paying rent to NRI landlords must deduct TDS @30%.

If Employer can ascertain the rent payable by the employee for the whole year, he can design salary payout in such a way that HRA component is equivalent to 'Exempted HRA' in the above calculation. This ensures HRA received in the hands of employee is completely exempt.

In the above example, Rs.71400 is taxable as HRA out of Rs.144000 received. To ensure entire HRA component is tax free in the hands of employee, Employer can provide Rs.6050 instead of Rs.12000 as HRA component in the salary and allot the remaining amount (12000-6050= 5950 ) into other allowances/benefits.

Note: It is preferable to calculate HRA exemption on a monthly basis if there is any change in the amount of Salary component, Rent paid, HRA received or City of residence from a Metro to Non-metro (or vice versa) during any part of the year.