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House Rent Allowance
If you live in a rented house, the Government allows you to show the rent you pay as an expense against your salary. This means that your net income comes down, and so does your tax liability. For this, your salary typically has a component called the House Rent Allowance (HRA). It sets the upper limit to which your rent can be claimed as an expense.
While you are free to pay any rent depending on the house you choose, the amount that is allowed to be claimed as expense is the minimum of the following three numbers:
1. Your House Rent Allowance (HRA)
2. Rent paid minus 10% of Basic Pay
3. 50% of Basic Pay (40% in case you live outside the four metros Mumbai, Delhi, Chennai and Kolkata)