1. If a person is in receipt of HRA, then according to sec 10(13A) HRA will be exempted in the hands of the salaried person as follows,
i) Actual HRA received (or)
ii) Rent paid less 10% of Salary (Basic + DA) (or)
iii) 40% of (Basic + DA) or 50% (in case of Mumbai, Chennai, Delhi, Kolkata)
whichever is lower will be an exempt income and can be reduced from salary.
2. First House rent allowance received from Employer will be included as a part of income and from that HRA will be exempted and reduced as per the above computation.
Please correct me if the above solution has an alternative view.