Basically many components will be there in salary structure, One among them in House rent allowance(HRA). Unlike other components HRA is not fully taxable ,it is exempted under income tax act 1961 section 10 (13A).

HRA exemption will be removed from total income and we will arrive final taxable amount after this deduction.

Who can opt for this:
Employee who stayed in rented house and in his salary structure HRA component should be present.Employee's stayed in own house and self employed cannot claim HRA.

How HRA exemption calculated 
Minimum amount in three  below condition taken for HRA exemption

1. Actual HRA received;
2.Actual rent paid less 10% of basic salary + DA
3.50% of [basic salary + DA] for those living in metro cities (40% for non-metros)

Example:

Say for example Ranjitha receiving monthly basic salary 20,000 and company providing 11,000 as HRA and she paying rent as 13,000 per month. Now lets go to the calculation

1. Actual HRA Received-(12*11000)                   - 1,32,000
2.  Actual Rent paid- (12*13,000)-   1,56,000
     Less 10 % basic (12*20000)-      24000
     Total                                                                 -1,32,000
3. 40 % of (12*20000)                                          - 96,000

Out of three 96,000 is lowest value and that will be considered for exemption.