House Rent Allowance is only partly tax-free. Section 10(13A) exempts the least of three figures, which is why two people on identical salaries can have very different exempt amounts.
Least of (1) actual HRA received, (2) 50/40% of Basic, (3) Rent − 10% of Basic.
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Figure one — the actual HRA your employer pays you.
Figure two — rent actually paid, minus 10% of salary (Basic + DA).
Figure three — 50% of salary if you live in a metro (Delhi, Mumbai, Kolkata, Chennai), otherwise 40%.
The exemption is the lowest of the three. The balance is taxable.
On Basic of ₹40,000, HRA of ₹20,000 and rent of ₹18,000 in Chennai: actual HRA ₹20,000; rent less 10% of salary ₹14,000; 50% of salary ₹20,000. The exemption is ₹14,000 and ₹6,000 of the HRA stays taxable.
Only Delhi, Mumbai, Kolkata and Chennai. Bengaluru, Hyderabad and Pune are non-metro for this purpose and attract the 40% figure, which surprises a lot of people.
Yes, if the circumstances are genuine — for example you own a house in one city and rent in another for work. Both claims must be defensible.
Then Section 10(13A) does not apply, but you may be able to claim rent under Section 80GG instead, subject to its own limits.
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