Under section 10(13A) of the Act, any special allowance specifically granted
 to an assessee by his employer to meet expenditure incurred on payment of
 rent (by whatever name called) in respect of residential accommodation occupied
 by the assessee is exempt from Income-tax to the extent as may be prescribed,
 having regard to the area or place in which such accommodation is situated and
 other relevant considerations. According to Rule 2A of the Rules, the quantum 
of exemption allowable on account of grant of special allowance to meet expenditure
 on payment of rent shall be the least of the following:
(a) The actual amount of such allowance received by the assessee in respect of the
relevant period i. e. the period during which the accommodation was occupied
by the assesse during the financial year; or
(b) The actual expenditure incurred in payment of rent in excess of 1/10 of the
salary due for the relevant period; or
(i) Where such accommodation is situated in Bombay, Calcutta, Delhi or
Madras, 50% of the salary due to the employee for the relevant period; or
(ii) Where such accommodation is situated in any other places, 40% of the
salary due to the employee for the relevant period,
For this purpose, "Salary" includes dearness allowance, if the terms of employment
 so provide,but excludes all other allowances and perquisites.
It has to be noted that only the expenditure actually incurred on payment of rent in 
respect of residential accommodation occupied by the assesses subject to the limits
 laid down in Rule 2A, qualifies for exemption from income-tax. Thus, house rent 
allowance granted to an employee who is residing in a house/flat owned by him is
 not exempt from income-tax.
The disbursing authorities should satisfy themselves in this regard by insisting on production
of evidence of actual payment of rent before excluding the House Rent Allowance or any
portion thereof from the total income of the employee.
Though incurring actual expenditure on payment of rent is a pre-requisite for claiming
deduction under section 10(13A), it has been decided as an administrative measure that
salaried employees drawing house rent allowance upto Rs.3000/- per month will be 
exempted from production of rent receipt. It may, however, be noted that this concession
is only for the purpose of tax-deduction at source, and, in the regular assessment of the
 employee, the Assessing Officer will be free to make such enquiry as he deems fit for 
the purpose of satisfying himself that the employee has incurred actual expenditure on
 payment of rent.
Further if annual rent paid by the employee exceeds Rs 1,00,000 per annum, it is
 mandatory for the employee to report PAN of the landlord to the employer. In case
 the landlord does not have a PAN, a declaration to this effect from the landlord along 
with the name and address of the landlord should be filed by the employee.